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The Canadian dollar is fighting its way back, clawing ground from its post-winter lows, but its newfound strength may rest on shakier foundations than it appears. While optimism is creeping back into FX markets, particularly after Canada’s Liberal Party now under Mark Carney pulled off a narrow re-election victory, uncertainties still cloud the horizon.
The CAD initially rallied as markets digested the news of a Carney-led continuity in power, with USD/CAD dipping toward 1.3809. That move quickly faded, though, once it became clear that the Liberals may fall short of a majority. This leaves Carney in the precarious position of needing support from smaller parties to push through any meaningful policy a dynamic that introduces more complexity at a time when clarity is needed.
USDCAD H4 Chart
Trump’s Tariff Tinkering: Markets Sensing a Pivot
On the other side of the border, the U.S. dollar is consolidating after April’s sharp selloff, bolstered by reports suggesting President Trump is preparing to soften his aggressive stance on auto tariffs. A proposed exemption framework would allow automakers to receive partial reimbursement for tariffs on imported parts a temporary lifeline aimed at avoiding further disruptions to U.S. manufacturing. But even this “reprieve” is conditional and designed to force production further onshore over time.
Commerce Secretary Howard Lutnick pitched it as a “major victory,” but markets know better than to take such pronouncements at face value. The 25% tariff on foreign auto parts is still due to kick in on May 3rd. Unless Trump signs the promised amendments into law something he’s hinted could happen imminently automakers and FX markets alike will be watching nervously.
DXY H4 Chart
What’s Holding Back the Canadian Dollar?
Despite the CAD’s recent rebound, the rally may be running ahead of itself. Yes, Canada was largely spared from Trump’s Liberation Day tariff blitz in March, and that has buoyed sentiment. But with the USMCA up for review next July and Carney pledging to negotiate “ambitious, sovereign-respecting” changes, the road ahead is anything but smooth.
Investors also need to reckon with the lingering risk of a domestic slowdown. If trade disruptions escalate or fiscal negotiations stall in a divided Parliament, the Bank of Canada may find itself forced to cut rates again something markets have yet to fully price in.
Outlook: The Volatility Beneath the Surface
USD/CAD’s movements in the coming weeks will likely be shaped more by political manoeuvring than pure economics. Tariff headlines, USMCA negotiations, and potential policy shifts under a minority Carney government will all feed into market volatility.
While short-term technical suggest the pair may continue to bounce within the 1.38–1.39 range, the fundamentals are far from settled. For traders, that means staying nimble, watching for White House and Ottawa headlines, and remaining wary of assuming any recent trend will last.
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