Canada's Trade War Struggle Puts Loonie Under Pressure. Forecast as of 14.09.2026
Can Canada defend itself against its southern neighbor? The answer is still a long way off. In the early stages of the standoff between Washington and Ottawa, USD/CAD bears appear to be bearing the brunt of the losses. Let's take a closer look at the situation and develop a trading plan.
Major Takeaways
- Ottawa has imposed retaliatory tariffs on US imports.
- The Canadian labor market is beginning to cool.
- The trade war will keep the BoC on the sidelines.
- Long positions on the USD/CAD can be opened with targets of 1.396 and 1.404.
Weekly Fundamental Forecast for Canadian Dollar
When sovereignty is at stake, sacrifices are necessary. Canada becomes embroiled in a trade war with its southern neighbor—a war that even China ultimately lost. On September 8, Ottawa imposed tariffs on $20 billion worth of US imports in retaliation for similar measures introduced by Washington. Donald Trump responded by banning the purchase of certain goods from Canada and threatening to raise tariffs on metals and automobiles to 50% starting January 1. As a result, the USD/CAD pair finally skyrocketed.
In reality, Canada does not want to become a second Venezuela. After the country's president was kidnapped, Donald Trump began discussing the possibility of incorporating the country into the United States. In reality, Venezuela is no longer simply a state, but a vassal, a colony, or something along those lines. It is a victim of the Donroe Doctrine—a term describing Washington's dominance over the Western Hemisphere, analogous to the Monroe Doctrine, which established the principle of US influence in the region.
Bank of Canada Overnight Rate
Source: Bloomberg.
The loss of sovereignty looms over Canada, and the struggle to preserve its independence will likely come at the cost of lower living standards, slower GDP growth, and a weaker labor market. The national currency, highly sensitive to the Bank of Canada's monetary policy, is likely to feel the pressure first. After Tiff Macklem and his colleagues met in early September, the derivatives market was convinced the overnight rate would continue to rise through the end of 2026, with three rounds of monetary tightening expected by June 2027. However, the trade war and signs of a cooling labor market forced investors to reconsider that outlook. As a result, USD/CAD bears were forced to retreat.
In August, Canada's labor market shed 41,700 jobs after adding 180,000 from April to July. Meanwhile, US nonfarm payrolls surged by 162,000. The divergence between the two labor markets boosted the USD/CAD pair.
Canada's Monthly Employment Change
Source: Bloomberg.
Cracks in the Canadian economy, emerging after a strong second quarter, are likely to dampen the BoC's appetite for further monetary tightening—even as inflation remains stubbornly high. At the same time, the 2.25% overnight rate gives the USD/CAD bulls a comfortable advantage. The federal funds rate is 150 bps higher, while the Fed is on the verge of beginning a new cycle of monetary tightening.
Canada is fighting back against a far more powerful opponent and seeking to strengthen its ties with the EU. However, the road ahead will be difficult, especially in the early stages—and the loonie is likely to bear the brunt of the pressure.
Weekly USDCAD Trading Plan
A Fed rate hike, coupled with the FOMC's projection that the tightening cycle will continue at its September 15–16 meeting, would give traders an opportunity to add to long positions established at 1.382 and 1.387 in the USD/CAD. The initial upside targets are 1.396 and 1.404.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.Publication date:
2026-09-14 10:38:31 (GMT)
