In a stark reminder of how quickly market sentiment can shift, the S&P 500, which recently hit a record high, has now plummeted by 10% from its peak. The catalyst for this dramatic reversal? The ongoing US-China trade tensions, with President Trump threatening to double tariffs on steel and aluminum imports from Canada in response to Canada’s own retaliatory measures. This escalation is rattling investor confidence, fueling concerns about a potential global slowdown, with indices such as the Nasdaq and DAX seeing significant losses. Meanwhile, the Australian stock market has fallen nearly 9.5% from its record highs, underscoring the growing risk aversion.
This volatile backdrop saw USD/CAD briefly spike to 1.45, but the move was short-lived, with Ontario’s Premier intervening, announcing a freeze on electricity tariffs and preparing to fly to Washington for negotiations. Despite the diplomatic efforts, the broader market concerns remain, and investor pessimism over US growth is dragging the US dollar to a four-month low, as speculation mounts around potential Federal Reserve rate cuts.
Implied Volatility Rises Ahead of Key Economic Events
The implied volatility for USD/CAD has spiked to 123% for the day, reflecting a higher-than-usual level of uncertainty ahead of key data releases. The Bank of Canada (BOC) is widely expected to cut its key interest rate by 25 basis points, marking its seventh consecutive rate reduction. However, the market remains uncertain whether this cut will be dovish, given recent comments from BOC Governor Tiff Macklem.
While tariffs are expected to severely dampen Canada’s economic growth in the near term, they could also lead to rising prices, forcing the BOC to recalibrate its policy stance. The geopolitical tension around Trump’s tariffs could complicate matters further, potentially leading to a less aggressive rate-cutting cycle, which could bolster the Canadian dollar. The looming US inflation data also plays a critical role, with inflation figures expected to show a slight slowdown. However, the risk remains that the numbers could surprise to the upside, keeping the US dollar under pressure.
USD/CAD Technical Outlook: Resistance at 1.45
Technically, USD/CAD faces resistance at the 1.45 level, which has proven difficult to break in recent sessions. Despite several attempts, the pair has failed to close above this mark, with a gravestone doji forming on Tuesday, signaling potential weakness. However, the large bullish range expansion candle preceding the doji suggests that buyers are still active, keeping the upward bias intact for now.
A move towards the cycle highs is possible, though traders should be cautious, as any rally may be short-lived. A less dovish-than-expected BOC rate cut could provide some support to the Canadian dollar, but a breakthrough in the tariff dispute could weigh more heavily on USD/CAD. The key levels to watch are 1.45 and the monthly pivot, with a potential bearish range expansion following a rejection of these levels.
AUD/CAD Struggles to Maintain Momentum Above 91c
The AUD/CAD pair has shown resilience since its January low, recovering half of its losses from the September 2024 high. However, price action has been choppy, suggesting that the rally may be corrective rather than the start of a sustained uptrend. The 91c level has proven to be a formidable resistance point, with three failed attempts to close above it in recent weeks.
On the daily chart, a bearish pin bar formed just below the 200-day simple moving average (SMA), indicating that sellers may be gaining control. Additionally, bearish divergence on the RSI supports the view that AUD/CAD could face downward pressure in the near term. If the pair fails to clear the 91c level, the downside target is around 90c, which coincides with the 50-day SMA and weekly volume point of control (VPOC), offering a potential support zone.
Outlook
Both USD/CAD and AUD/CAD are facing pivotal moments as global trade tensions, inflation data, and central bank policy decisions weigh heavily on market sentiment. USD/CAD traders should focus on developments surrounding the US CPI and the BOC rate decision, while AUD/CAD remains sensitive to broader risk sentiment and price action around the 91c resistance. As both pairs navigate these headwinds, volatility is expected to remain elevated in the coming week.
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