USD/CAD has fallen significantly in recent weeks. However, this was due to pronounced USD weakness rather than CAD strength. If the US dollar recovers, we are likely to see higher levels again. In addition, the Canadian real economy continues to struggle and the threat of US tariffs has not yet been averted. CAD risks are only likely to slowly subside in the second half of the year, Commerzbank's FX analyst Michael Pfister notes.

USD/CAD drops despite trade war fears

"It was only a few weeks ago that we were talking about the threat of a full-blown North American trade war and US tariffs on Canadian goods. However, instead of heading towards 1.60, USD-CAD has fallen sharply in recent weeks and is now trading at levels not seen since the US election in early November. The lower USD/CAD levels have thus been almost entirely driven by the pronounced weakness of the USD."

"Despite these developments, we see a higher probability of a return to higher USD/CAD levels. Our economists expect the Fed to be rather cautious with its rate cuts, despite the concerns about the real economy. If our US economists are right, both our assessment of the US real economy and the Fed should lead to a recovery in the US dollar in the coming weeks."

"Given the risks from US trade policy and the weakening real economy, there is a risk that the Bank of Canada (BoC) will have to lower its policy rate into expansionary territory. In the best-case scenario, the BoC should have no problem keeping rates at this level for an extended period. In the much worse scenario, several rate cuts are likely this year."

Source: Fxstreet