The U.S. dollar is slipping under the weight of softening macro data and deteriorating fiscal dynamics, while the Canadian dollar holds its ground on the back of economic resilience and commodity support. With USD/CAD entrenched in a clear downtrend and macro-fundamentals leaning bearish for the greenback, this pair presents a high-quality short opportunity heading into Q3 2025.

Fundamental Analysis

The economic divergence between the United States and Canada is becoming increasingly apparent. The U.S. economy contracted by -0.5% QoQ in the latest print — a sharp reversal from the +2.4% expansion seen earlier. At the same time, retail sales slumped -0.9% MoM, business confidence has plateaued at 49, and consumer confidence, while improving, is still fragile amidst the USD/CAD currency dynamics.

Inflation remains modest at 2.4% YoY, but the monthly rate has decelerated to just 0.1%, raising expectations that the Federal Reserve will begin cutting rates before year-end. With the Fed Funds Rate already at 4.50%, U.S. real yields are compressing, narrowing the rate premium that once supported the dollar as USD/CAD trends fluctuate.

Contrast this with Canada: GDP growth printed a steady +0.5% QoQ, inflation is running at 1.7% YoY with a monthly rebound to +0.6%, and the Bank of Canada remains on hold at 2.75%. With headline data stabilising and inflation turning slightly higher, the BoC is in no rush to follow the Fed into a dovish pivot. The BoC’s tone has been measured, but less reactive than the Fed — a relative policy advantage in the USD/CAD context.

Structurally, the U.S. is running deep twin deficits:

• Fiscal deficit: -6.2% of GDP
• Current account deficit: -3.9% of GDP

Canada, by comparison, holds a fiscal deficit of just -2.1%, a smaller trade gap (-7.14B), and a current account that’s stabilising around -1.0% of GDP. This divergence in macro discipline enhances CAD’s relative appeal, particularly as USD/CAD’s dynamics show the USD’s global dominance eroding.

Sentiment Analysis

Sentiment continues to drift away from the U.S. dollar:

• Market consensus is building around a “soft landing” narrative turning into a “no landing” stall, with growth data undermining confidence in USD/CAD exchange rates.
• Positioning in the USD has turned net neutral among institutional investors, with short bets slowly building against high-beta currencies like CAD.
• Canadian business and consumer confidence are on the rise (48.9 and 48.8 respectively), signalling improved domestic sentiment where USD/CAD fluctuates.
• Oil prices, a key CAD driver, remain stable above $80, reinforcing CAD support from terms of trade, affecting the USD/CAD pairing.

Retail traders remain short CAD, but this positioning is likely to be absorbed by real money flows aligned with macro directionality while USD/CAD adapts. The USD, once buoyed by its rate differential, is increasingly being repriced for stagnation risk.

Technical Analysis

The USD/CAD daily chart confirms a well-established bearish trend:

• Price is firmly below the Ichimoku Cloud, with both Conversion (1.3689) and Base Line (1.3700) acting as active resistance, influencing USD/CAD trends.
• Lagging Span is below price, confirming bearish structure for USD/CAD projections.
• The cloud ahead is thick and red, with no bullish twists in sight — a sign of persistent downward pressure on USD/CAD scenarios.

Momentum indicators:

• RSI at 38.83, bearish but not yet oversold, allowing room for further downside in USD/CAD trading views.
• MACD remains in negative territory with the histogram marginally below zero, indicating slow but consistent bearish momentum within USD/CAD market analysis.
• Volume is stable with recent down days showing elevated activity — sellers remain in control, impacting USD/CAD pressures.

Key downside levels lie at 1.3500, then 1.3400 — both previous support zones for USD/CAD. A daily close above 1.3700 would invalidate the setup.

Conclusion

Short USD/CAD stands out as a strong macro and technical trade, driven by U.S. growth contraction, rising Fed cut expectations, and unsustainable twin deficits. Canada’s steady macro prints, hawkish patience at the BoC, and stable commodity environment give CAD a clear edge in this cross for USD/CAD strategies.

Technicals support a continuation of the bearish trend, with price action reinforcing momentum to the downside. Barring a surprise rebound in U.S. data or sharp BoC dovishness, the path of least resistance remains lower within USD/CAD outlooks.