Canada’s economic growth may slow down following U.S. tariff hike.

The Canadian dollar weakened slightly as concerns over U.S. trade policy resurfaced following a trade dispute between the U.S. and Colombia over the past weekend. This has raised concerns about a 25% import tariff on Canadian goods, set to take effect on February 1 under President Donald Trump. The potential trade impact on Canada’s key partners could significantly slow down trade activity, leading to reduced foreign capital inflows, particularly in the manufacturing sector, which plays a crucial role in the country’s exports.

Additionally, declining crude oil prices—one of Canada’s major exports and a vital part of its economy—have added pressure and heightened concerns regarding import tariffs on Canada, Mexico, and China. These tariffs could have widespread implications, affecting global energy demand and overall economic growth. These risks, combined with the significant interest rate differential between the U.S. and Canada, make it even more challenging for the Canadian dollar to recover. The Bank of Canada's potential interest rate cut could directly impact the currency’s value.

Investors anticipate a 25 basis point (bps) rate cut by the Bank of Canada. Furthermore, expectations for additional economic stimulus measures have increased, with speculation that such measures could be announced sooner than expected due to Canada’s declining inflation trends.

On the U.S. economic front, the Federal Reserve is set to announce its interest rate decision tonight. Many investors and analysts predict that the Fed will maintain its current rate despite pressure from the new U.S. president. The Fed continues to view inflation and core inflation as too high to justify a rate cut this month and intends to analyze further economic data in the coming months before making any adjustments.

CoStar Group noted that there is a possibility that the Bank of Canada may lower its interest rate to 2.5% from the current level of 3.25%. However, several downside risks remain, particularly regarding Canada’s ability to sustain economic growth after the tariff hike. Additionally, a rapid reduction in interest rates could increase import costs, potentially driving inflation back up.

The yield on Canada’s 10-year government bonds has fallen to 3.23% due to a sell-off in technology stocks, fueled by concerns over U.S. dominance in artificial intelligence (AI). As a result, the yield spread between U.S. and Canadian government bonds has widened, reflecting diverging monetary policy expectations. While the Federal Reserve is expected to keep interest rates unchanged, the Bank of Canada is anticipated to cut rates by another 25 bps due to political uncertainty, slowing economic growth, and unclear inflation data.

Techical analysis data (5H)

Resistance: 1.4468, 1.4495, 1.4518

Source: Investing.com

Buy/Long 1: If the price touches support in the price range of 1.4395 - 1.4418 but cannot break the support at 1.4418, you may set a TP at approximately 1.4495 and SL at around 1.4368 or according to your acceptable risk.

Buy/Long 2: If the price breaks the resistance in the price range of 1.4468 - 1.4495, you may set a TP at approximately 1.4518 and SL at around 1.4395 or according to your acceptable risk.

Sell/Short 1: If the price touches resistance in the price range of 1.4468 - 1.4495 but cannot break the resistance at 1.4468, you may set a TP at approximately 1.4395 and SL at around 1.4518 or according to your acceptable risk.

Sell/Short 2: If the price breaks the support in the price range of 1.4395 - 1.4418, you may set a TP at approximately 1.4368 and SL at around 1.4495 or according to your acceptable risk.

Pivot point January 29, 2025 10:59 PM. GMT+7