The Canadian dollar resumed its recent rebound after Canada and the United States restarted talks. The USD/CAD exchange rate plunged to a low of 1.3600 on Tuesday, the lowest level in a week, and 8% below the highest level this year.
Potential US and Canada trade deal
The main catalyst for the USD/CAD crash this week was the restart of trade talks between the US and Canada.
This situation occurred after Canada caved in and ended the planned introduction of a 3% digital tax that would have applied to US companies, including Meta Platforms, Alphabet, and Amazon.
Canada ended this implementation a few days after Donald Trump ended the talks between the two countries. Without these talks, US tariffs on Canadian goods would have reset at a much higher rate when the 90-day deadline ended.
Canada needs the trade deal because its economy is not doing well. The most recent data showed that the Canadian economy contracted by 0.1% in April, led by a 1.9% drop in the manufacturing sector.
Canada’s wholesale trade sector also contracted by 1.9% in April. This contraction was offset by a growth in the finance and insurance, and public administration sectors.
Analysts expect the economy to contract again in May, potentially leading to negative growth in the second quarter. Most of this weakness is because of Trump’s tariffs on Canadian goods.
The Bank of Canada (BoC) and the IMF have warned that the economy will slow this year. In a recent note, the BoC estimated that the Canadian economy will grow by 1.4% this year, while inflation will average 2.2% this year.
Therefore, analysts anticipate that the Bank of Canada (BoC) will restart cutting interest rates to stimulate growth.
US Dollar Index crash
The USD/CAD exchange rate has also declined due to the ongoing decline in the US Dollar Index (DXY). The index, which weighs the dollar against other currencies, has plunged to $96.7, its lowest level in years. It has plunged by over 12% from the year-to-date high, putting it into a correction.
The dollar index has formed an inverse cup and handle pattern, along with a death cross, indicating further downside in the coming months.
This crash has happened as investors predict that the Federal Reserve will cut interest rates soon as the impact of tariffs on inflation will be muted.
The next key catalyst for the US/CAD pair will be the upcoming manufacturing PMI numbers on Tuesday. These numbers will be followed by the upcoming nonfarm payrolls data on Thursday.
USD/CAD technical analysis
The daily chart shows that the USD/CAD exchange rate has been in a strong bearish trend in the past few weeks, moving from a high of 1.4790 in February to the current 1.3600.
It recently crashed below the ascending trendline that connects the lowest swings since 2024. It also formed a death cross as the 50-day and 200-day Exponential Moving Averages (EMA) crossed each other. A death cross is a highly popular bearish pattern.
Therefore, the USD/CAD pair will likely continue falling as sellers target the key support at 1.3425, its lowest point in September last year. A move below that support level will point to more downside.
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