Tariff pause leaves CAD bid

CAD: Tariff pause leaves CAD bid

USD/CAD is trading near 1.3873 after President Trump paused the threatened 50% tariffs on roughly $20 billion of Canadian goods for three days. The pause came less than two hours before the levies were due to start, giving negotiators time to finish an interim agreement. Markets treated the news as relief, not resolution.

Trump framed the three-day delay as evidence that a deal is close, but Canada’s response was more careful because the documents are not finalized and the broader tariff dispute remains open. The latest 50% levy has been delayed, not removed, while steel, aluminum, autos, lumber and dairy still need a clearer path. That is why CAD gained only modestly: the tail risk has been pushed out, but not priced away.

Is it Keystone XL or tariffs?

President Trump appears to be using the tariff pause as leverage over energy policy. The threatened 50% tariffs were delayed for three days, but the same message also raised the prospect of reviving Keystone XL. That was not an incidental detail. It suggests the White House may be trying to fold Canadian oil infrastructure into a broader trade bargain, giving markets a reason to treat the tariff reprieve as conditional.

That helps explain Carney’s caution. A tariff pause is useful, but accepting Keystone XL as part of the deal would force Ottawa into a politically difficult trade-off. A revived cross-border pipeline would support Alberta, improve market access for Canadian crude and hand Trump an energy-policy win. It would also reopen the climate, Indigenous and environmental fights that made Keystone one of the most divisive North American infrastructure projects of the past two decades.

A reminder that, Canada’s regulator approved the Canadian portion in 2010, and the key permit that killed the project was the US presidential permit, revoked by Joe Biden in January 2021. TC Energy then terminated the project in June 2021.

The pressure point is clear: more Canadian oil infrastructure, or the risk of more US tariffs. But Keystone XL cannot simply be switched back on. A related project has received US backing and could use some pipe already built in Canada, but it still needs commercial commitments, additional links, state approvals and could face legal challenges.

USD/CAD

The rate spread continues to move in CAD’s favour. Canada’s two-year yield is near 2.95%, while the US two-year is around 4.16%, leaving the spread close to 121bp, down from roughly 145bp in late July. Canadian data have steadily beaten expectations, while US data have softened. July CPI, the jobs report, the trade surplus and manufacturing sales all support the view that Canada’s macro backdrop is improving.

The next three days are the real test. A narrow pause on the latest tariff threat would help, but it would not settle the larger trade dispute across steel, aluminum, autos, lumber and dairy. A broader agreement would give CAD a cleaner path lower in USD/CAD. Today’s FOMC minutes matter too, as a hawkish tone could slow the dollar’s decline and cap CAD gains.

Technically, USD/CAD has fallen from 1.4234 in late June to the high-1.38s. The pair has broken below 1.40 and 1.39, with the June low near 1.3839 now in view. A confirmed deal could open the 1.37 area. A breakdown in talks, or another reversal from Washington, could send USD/CAD back around1.40 quickly.

USD: A two-sided story

The US dollar sits at an interesting juncture. On the one hand, several factors continue to support the greenback. Geopolitical risks remain elevated, oil prices are still well above pre-conflict levels, and the US economy continues to outperform many of its peers. Higher energy prices also support the dollar through both terms-of-trade dynamics and the Fed’s inflation reaction function. Long-end Treasury yields remain elevated, reinforcing the view that markets are not pricing a significant deterioration in US growth.

However, since peaking in June, the dollar has struggled to generate sustained upside despite ongoing tensions in the Middle East. Markets appear increasingly focused on the Fed rather than geopolitics. Softer inflation data, weaker payrolls and a declining US Economic Surprise Index have weighed on the dollar of late. Coming on the heels of softer retail-sales data, July’s industrial production report also saw weakness in consumer goods production. All this suggests growth is becoming increasingly uneven rather than accelerating broadly across the economy.

This has eroded Fed tightening wagers. September hike odds have fallen from around 70% to closer to 40%. With the rates channel doing a lot of heavy lifting in FX of late, this has weakened the dollar. Questions around Fed credibility have also not disappeared. Chair Warsh’s reluctance to provide clear forward guidance and reports of regular contact with President Trump have revived concerns about Fed independence, an issue that weighed on the dollar earlier this year.

Positioning also warrants attention. Speculative dollar longs remain substantial, even after recent reductions, leaving scope for further unwinds if the data continue to disappoint. Japanese intervention remains another risk. While USD/JPY has rebounded, the relatively modest yen rally following coordinated action from Tokyo and Washington suggests additional intervention may be required to force a sustained reversal in the long-running yen-short trade. Any renewed intervention could weigh on the broader dollar given the yen’s importance within the dollar index.

The next major test is today’s the release of the July FOMC minutes. The meeting itself delivered a confusing message, with a 9–3 vote to leave rates unchanged followed by a press conference that triggered a sell-off in longer-dated Treasuries. Given the softer inflation and activity data seen since then, it may prove difficult for markets to fully re-embrace a hawkish Fed narrative.

MXN: USD/MXN holds near two-year low

USD/MXN is trading near 17.04, close to its strongest peso level in two years, despite a tougher geopolitical backdrop. The US-Iran ceasefire has expired, the Strait of Hormuz risk has intensified, and Brent briefly moved above $92. That would normally pressure high-beta EM FX. The peso has held up because Mexico’s carry remains a key anchor.

Mexico’s two-year yield is near 7.21%, compared with about 4.16% for the US two-year, leaving roughly 305bp of carry in MXN’s favour. The 10-year spread is also wide, with Mexico near 9.18% and the US near 4.68%. Recent bond auctions showed strong demand, and reserves have risen to about $257.4 billion. Banxico’s 6.50% hold and cautious inflation message keep the carry story intact.

The technical setup still favours MXN, but positioning is no longer light. USD/MXN is sitting near the lower end of its recent range, with 17.00 the next major level. A clean break would bring 16.80-16.90 into view. The risks are clear: Hormuz escalation, a hawkish FOMC minutes release, or North American trade stress spilling into USMCA sentiment could trigger a fast unwind in crowded peso longs.

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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.