BUZZ-COMMENT-Sanguine USD/CAD tariff reaction masks breakout potential

Jan 21 (Reuters) - Overnight reports that the new Trump administration will likely place 25% tariffs on Canada as soon as Feb. 1 have been met with a sanguine reaction in USD/CAD. Though the pair rose from 1.4300 to settle in the mid-1.44s, after failing to sustain a break above 1.45, traders remain reticent to clearly break recent ranges (1.4330-1.4465).

The prospect of 25% tariffs in two weeks should keep risks to USD/CAD firmly skewed to the topside and thus leave the 2015-2020 double top at 1.4669-89 vulnerable to a break, clearing the way for a 1.50 test.

While bearish bets on the Canadian dollar have been built up to historical levels, outright shorts are around the same mark they were prior to the first mention of 25% tariffs on Canadian goods.

What is more, initial reports on inauguration day that there would be no day-one tariffs, which prompted a pullback to 1.4260-1.4300, are likely to have flushed out weak USD/CAD longs (CAD shorts). Thus, with a slight cleansing of positions, this should provide less of a headwind to push USD/CAD higher.

Looking ahead, Canada is likely to provide a clearer picture on the size and scope of countermeasures in response to the latest tariff headlines, which should keep USD/CAD underpinned. This is unlikely to be a notable mover for the Canadian dollar given the focus on U.S. tariffs.

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(Justin McQueen is a Reuters market analyst.The views expressed are his own, editing by Ed Osmond)

((justin.mcqueen@thomsonreuters.com))