Image © Adobe Stock
The Pound-to-Canadian Dollar exchange rate (GBPCAD) reached a seven-year high on Monday, but it is now screaming overbought heading into Tuesday's tariff decision.
It's been a remarkable run for GBPCAD, having notched up 14 daily advances in the past 15 trading days, and on the day it didn't rise, it fell a mere 0.04%.
Monday's gains take it to a peak of 1.8250, a level last seen in March of 2018, which speaks of the broader GBPCAD trend; momentum is firmly towards the upside in GBPCAD.
That being said, there is a heightened risk of a setback this week, with GBPCAD's daily RSI at 74.56, which is unusually elevated.
Above: GBPCAD at daily intervals.
An RSI above 70 signals overbought conditions and is usually a precursor to a consolidation or pullback. The RSI on GBPCAD rarely deviates outside of 30 on the downside and 70 on the upside, confirming that a mean-reversion is imminent.
The obvious trigger to the setback would be the announcement of another delay to U.S. tariffs on Canadian imports on Tuesday. This would signal that negotiations are continuing and that the outcome will be far less severe than initially touted by Trump.
Howard Lutnick, U.S. Commerce Secretary, said on Sunday that both Canada and Mexico have been working hard on controlling the border, but fentanyl was still an issue, and the tariffs were contingent on both being resolved.
"They have done a lot, so he’s sort of thinking about right now how exactly he wants to play with Mexico and Canada and that is a fluid situation,” Lutnick said on Fox News’ Sunday Morning Futures, speaking of Trump.
There are going to be tariffs on Tuesday on Mexico and Canada, exactly what they are, we’re going to leave that for the president and his team to negotiate,” he added.
The comments all but confirm that negotiations are underway and that the worst-case outcomes are to be avoided as there is ample evidence that Canada and Mexico's actions will provide Trump the 'win' required to row back.
When clarity is provided on Tuesday, CAD will recover.
"Markets remain somewhat skeptical that, if it comes to it, 25% tariffs will be in place for long," says Shaun Osborne, Chief FX Strategist at Scotiabank.
"The economic consequences for Canada from high tariffs are significant but they non-negligible for the U.S., given intricate North American supply chain relationships across key industrial sectors (autos, metals, textiles). The impact of border tariffs may emerge quickly across the US economy and financial markets which could raise pressure for a quick reversal," he explains.
The U.S. is proposing a 25% tariff on Canadian imports, with a carve-out for crude oil, natural gas and other energy products, which are 10%.
This clearly shows Trump acknowledges tariffs are inflationary, which is unhelpful when U.S. inflation accelerated to 3.0% in 12 months to January.
"Prime Minister Justin Trudeau’s government has mused about applying its own export tax to crude to make sure US drivers feel the pain of Trump’s trade war. It’s not yet clear if they will, and Trudeau is about to leave office," adds Osborne.
The U.S. economy is also slowing, with survey data signalling it is off its peaks, in no small part due to the uncertainty spun by Trump's policy making and Elon Musk's DOGE programme.
If Trump signals any willingness to row back on his maximalist tariff policy, CAD will recover.