The USD/CAD currency pair spiked sharply after former U.S. President Donald Trump threatened tariffs on Canada. A short squeeze was triggered by the social media announcement, which stopped the pair’s quarterly decline in almost ten years.
Trump accused Canada of unfair trade practices and canceled all trade talks with the country. Furthermore, this sudden move reversed the pair’s previous bearish trend, pushing volatility higher just before the weekly close. Therefore, the situation is still unclear and, if tensions increase, could result in wider market changes.
Will Trump Tariffs Worsen US-Canada Trade Rift?
Trump’s post on Truth Social stated that “ALL discussions on Trade with Canada” are “terminated, effective immediately.” The message was a reaction to Canada’s Digital Services Tax, which targeted tech companies in the U.S. These comments sent USD/CAD soaring shortly after the pair had dropped more than 5% for the quarter.
Before Trump’s intervention reversed the trend, this pair had experienced its steepest decline since Q1 2016. The rally forced the pair to move closer to the 1.3750 mark, which had been a formidable barrier. Thus, the action shows how susceptible currency markets are to political news, especially when tariffs imposed by Trump reappear.
USD/CAD Bounces as Shorts Rush to Exit
Late Friday, low liquidity frequently magnifies moves, and this instance was no different. Traders who were caught off guard rushed to cover their positions, creating a short squeeze situation.
As trade tensions subsided and the value of the US dollar declined, the Canadian dollar increased in value during Q2. However, it quickly changed when Trump tariffs were reinstated. The squeeze forced the pair to test 1.3750, a key resistance level that had served as support in May.
This is more than just a technical squeeze. It is similar to what happened in January, when Trump’s previous threats caused the pair to soar. Thus, consistent purchasing will determine whether this becomes a trend. Following this breakout, the market will be looking for higher lows, which are indicative of trend reversals.
Can Bulls Turn USD/CAD Breakout into Trend?
Low liquidity can still cause unpredictable movements. If the short squeeze persists, higher resistance levels like 1.3798 and 1.3905 will come into focus. Additionally, bulls will need to defend support levels if they want the move to be more than a temporary spike.
A new uptrend might be established if 1.3750 turns from resistance to support. Trump’s words will be crucial, and any additional escalation with Canada might cause tensions to rise. Additionally, market participants are keeping an eye on both countries’ economic data to confirm the direction of the trend.
Bullish sentiment may pick up speed if buying interest materializes close to support areas. Above the short-term levels, 1.4000 and 1.4178 are important. The long-term significance of these zones could decide the trend of the USD/CAD exchange rate if bulls gain ground. Until then, the market is still very susceptible to changes in sentiment and political developments.
Bottom Line
Trump tariffs shook up what had been a quiet Q2. By reversing weeks of Canadian dollar strength, the short squeeze demonstrated how quickly political risk can alter market dynamics. Therefore, traders’ reactions to support zones will be crucial. Market sentiment may change if resistance levels are consistently surpassed. However, any signs of retreat could quickly bring sellers back in control.
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