Synopsis:

Credit Agricole sees the March 4th US tariff decision as a make-or-break event for USD/CAD. The pair has been hovering around 1.44 for over two months, awaiting clarity on whether tariffs on Canadian imports will proceed. Depending on the outcome, USD/CAD could swing towards either 1.48 or 1.41.

Key Insights:

1️⃣ Tariff Decision on March 4th is Critical ⚖️

• The US administration granted a one-month reprieve on broad tariffs for Canada and Mexico.
• Trump reaffirmed last week that tariffs are moving ahead as scheduled.

2️⃣ Contradictions on Canada’s Trade Relationship 🇨🇦

• Trump called for a relaunch of the Keystone XL pipeline, despite threats of tariffs on Canadian energy products.
• This raises questions about his real intentions towards Canada.

3️⃣ Market Pricing in Uncertainty 📊

• USD/CAD risk reversals have spiked to early February levels, reflecting growing concerns in FX options markets.
• The CAD could gain if tariffs are delayed, keeping USD/CAD around 1.41 (Q1 target).
• However, if tariffs are imposed, USD/CAD could retest multi-decade highs near 1.48.

4️⃣ Potential Retaliation from Canada 🔄

• Any Canadian retaliatory measures—from the government or private sector—will determine where USD/CAD stabilizes after the tariff decision.

Conclusion:

Credit Agricole views the US tariff decision as a binary event for USD/CAD. A delay could send the pair to 1.41, while confirmation of tariffs may drive USD/CAD to 1.48, with potential retaliation from Canada shaping the longer-term direction.