The Canadian Dollar had a big drop on Thursday with the currency dropping 0.66% against the US Dollar. This has put the currency at risk of losses for a second day in a row. Illegal trade agreement enforcement, along with rising concern that health of the US economy, its largest trading partner, are starting to weigh it down. The USD/CAD pair traded to a multi-week high above 1.3930, reflecting the dramatic change in market sentiment.
As the trading day wore on, technical factors showed that the 1.3800 area had created a tentative floor for the Canadian Dollar. Additionally, this created a perfect storm for an uncomfortable investing climate for both traders and investors. With the grace period on “reciprocal tariffs” set to expire on June 9, uncertainties surrounding trade relations continue to influence market dynamics.
Economic Influences on the Canadian Dollar
The value of the Canadian Dollar very much hinges on a variety of economic indicators. Most egregiously, it is driven by political data received from the United States. Given that the United States is Canada’s largest trading partner, strong or weak economic indicators in the US always have swift, direct impacts on the Canadian dollar. Recent reports indicate that the health of the US economy remains a critical factor in determining the direction of the Canadian Dollar.
Aside from oil demand cross-border relations are extremely important. Partly, that’s because it has such a big influence on the value of the Canadian Dollar itself. Petroleum, after all, is Canada’s largest export, and frequently, a surge in global oil prices results in a direct and immediate increase in the value of the Canadian currency. So, when the oil prices go up, the demand for the Canadian Dollar increases, thereby strengthening its value relative to other currencies. Falling global oil prices can reduce global demand for the currency even further. That was clearly the trend during Thursday’s trading session.
Additionally, the US’s deep dependence on Canada for critical imports adds new weight to the relationship between the two currencies. The United States is uniquely dependent on the import of finished goods. This includes finished automobiles, automotive vehicle parts, light sweet crude oil from Alberta oilsands, and essential crop fertilizers. Specifically, about 90 percent of the US’s potash — an essential fertilizer — comes from Canada, demonstrating the deep economic ties that exist between the two countries.
Trade Relations and Tariff Concerns
Additionally, trade relations between Canada and the United States continue to be a key area of focus for market participants. As always, worries about tariffs remain at the forefront, especially with the grace period on reciprocal tariffs set to expire soon. Traders are learning quickly and developing rapidly as negotiations continue around the world, but new tariffs would be detrimental to both countries’ economies.
It’s anyone’s guess how much that uncertainty regarding tariffs has impacted the dramatic rise and fall of the Canadian Dollar in recent days. Traders are dueling in the trenches constantly to adapt to rapidly shifting political landscapes and opaque economic projections. The consequence is that volatility in exchange rates will persist. The downward pressure on the Canadian Dollar would have the potential to persist if the ongoing trade talks fail to bear sufficient fruit for both parties.
In the last couple trading sessions, USD/CAD has been a great example of this volatility, rocking 1.23% from bottom to top in two days wielding strong moves. This dramatic volatility highlights the challenges and uncertainty that traders must contend with as they try to steer through stormy economic waters and rising geopolitical tensions.
Market Reactions and Future Outlook
In particular, market reactions to economic indicators and major developments in US-China trade relations are key in determining how currencies will respond. Investors on both sides of the border are eagerly watching any Canadian or US data release that will give them a hint on where the currency is headed next. With unpredictability still set to dominate export-import ties, market players are all expected to take a wait-and-see attitude.