The Canadian dollar fell across the board after US-Canada trade talks collapsed and the United States imposed 50% tariffs on approximately $20 billion of Canadian goods, with Prime Minister Carney vowing 'dollar-for-dollar' retaliation from September 8. The move caps a turbulent stretch for the currency, which had strengthened earlier in the week on trade-talk optimism and a broad US dollar sell-off.

Dollar Sells Off After Treasury Buyback Announcement

The US dollar weakened across the board last week after the US Treasury announced that it will at least double the size of its liquidity-support buyback operations for longer-dated Treasury securities, increasing the maximum purchase from $2 billion to at least $4 billion per operation. Treasury Secretary Bessent then said that part of the operation is sending a message to the market that yields do not reflect underlying fundamentals, and added that the buyback could be more than $4 billion depending on conditions. The scale-up is notable because the buyback tool itself is still young: the Treasury had not run regular repurchase operations for roughly two decades before restarting them in 2024, making this an unusually rapid expansion of the program.

The Treasury intervention had a QE-like effect by lowering long-term yields and easing financial conditions, although it is not technically quantitative easing. That is why the greenback sold off across the board following the announcement. In the long term, long-term yields are driven by monetary policy, as they are simply the average expected path of short-term interest rates over the life of the bond plus a term premium, but they are more sensitive to changes in the economic outlook.

Focus Shifts to Warsh at Jackson Hole

The focus will now shift to the Federal Reserve and Warsh's speech at the Jackson Hole Symposium next week. The speech had been expected to be a non-event, given Warsh's preference for not giving forward guidance and the fact that the soft NFP and CPI reports eased Fed tightening concerns. After the Treasury buyback announcement, though, the address could actually be a market-moving event. That would fit the venue's track record: Fed chairs have repeatedly used the Kansas City Fed's annual Wyoming symposium to telegraph major policy turns, from the 2010 address that foreshadowed a second round of quantitative easing to the 2022 speech that reaffirmed the commitment to tightening.

If Warsh does not lean against the easing in financial conditions, the current "debasement" trades — long precious metals, bitcoin and short US dollar — will likely extend further. On the other hand, if he pushes back with language such as "recent easing in financial conditions, if sustained, could complicate the process of returning inflation to our target" or "if recent easing threatens progress toward price stability, we will not hesitate to respond appropriately" — the exact words cannot be known beforehand — the market may interpret it as a signal for a potentially hawkish September FOMC and trigger pullbacks in the "debasement" trades.

Loonie Whipsawed by Trade Headlines

Optimism over a US-Canada deal had given the loonie a boost after Wednesday's extension of talks, a move that was exacerbated by broad US dollar weakness. USD/CAD fell into a key support zone around the 1.3750 level before bouncing into Friday's close on profit-taking and possibly some hedging into the weekend. The currency's sensitivity to the dispute is structural rather than incidental: the United States takes roughly three-quarters of Canadian exports, so bilateral tariff policy feeds directly into the growth outlook that traders price into the pair.

The talks then collapsed and the tariffs took effect, and although the delayed retaliation may be keeping a door open for further negotiations, the Canadian dollar might stay on the back foot as markets reprice the outcome. The September 8 start of Canada's response now serves as the next concrete checkpoint for whether the standoff hardens or negotiations resume.

USDCAD Technical Analysis – Daily Timeframe

On the daily chart, USDCAD dropped into the 1.3750 support zone following the US Treasury buyback announcement and US-Canada deal optimism. The price bounced into Friday's close on profit-taking and opened the week higher as the trade talks collapsed. The natural target for the buyers should be the resistance zone around the 1.3920 level. The sellers, on the other hand, will either wait for the price to come into the resistance or break below the 1.3750 support to target new lows.

USDCAD Technical Analysis – 4-Hour Timeframe

On the 4-hour chart, a downward trendline is defining the bearish momentum. The sellers can be expected to lean on the trendline with a defined risk above it to position for a drop into new lows, while the buyers will want to see the price breaking higher to increase the bullish bets into the 1.3920 resistance next.

USDCAD Technical Analysis – 1-Hour Timeframe

On the 1-hour chart, a minor upward trendline is defining the current pullback. The buyers will likely lean on the trendline with a defined risk below the gap to keep pushing into new highs, while the sellers will look for a break to pile in for a drop back into the 1.3750 support. The red lines define the average daily range for today.

Upcoming Catalysts

Today, US Treasury Secretary Bessent unveils the sanctions against Iran. Tomorrow brings the US Consumer Confidence report, followed by the US PCE price index — the Federal Reserve's preferred inflation gauge — on Wednesday and the US Jobless Claims figures on Thursday. On Friday, the week concludes with Canada's GDP release and Fed Chair Warsh's speech at the Jackson Hole Symposium.

Source: ForexLive