Save for one, on Monday the Canadian Dollar was ground zero. It dropped over 0.5% today vs the US Dollar, its fourth consecutive day down. Investors are understandably spooked by the parachuting arc. At the same time, the USD/CAD currency pair is now well above the 1.4000 mark, a new indicator of the growing volatility. Analysts have called for the Canadian Dollar to be susceptible to additional losses until large improvements materialize in market fundamentals.
Whether the Canadian Dollar continues to rise or falls again largely depends on the sentiment of the wider market. The US economy, on the other hand, is already exhibiting unmistakable signs of recovery. That momentum goes a long way in explaining the performance of the Canadian Dollar. Due to recent changes in US trade tariffs, this relationship has become more complicated. Moving forward, it will be very important for investors to keep a watchful eye on key economic indicators.
Market Sentiment Drives Currency Movements
The Canadian Dollar continued its decline on Monday due to a combination of factors weighing on risk sentiment. The value of the currency is very responsive to overall world economic trends. A stronger US Dollar often leads to a weaker Canadian Dollar, and vice versa. With the USD/CAD pair reversing back into their 2000- and 2012-era long-term moving averages, traders are gearing up for possible bigger moves.
The prolonged uncertainty over US-China trade relations has been another key determinant of market sentiment. Following the first round of high-level trade talks this past weekend, the US government declared a standstill on planned tariff hikes. This decision has given a 90-day stay of execution to select Chinese products. The exclusion rules haven’t changed the existing 30% tariff we’re still charging on most other imports from China. This uncertainty continues to cast a pall over economic projections and saps investor confidence.
As the market digests these moves, a number of analysts are predicting a strong rebound for the Canadian Dollar in the future. This might occur in particular if US economic indicators do not begin to paint a better picture. With Producer Price Index (PPI) inflation expected later this week and Retail Sales figures next week, it’s a busy time. All of these key indicators have a profound effect on the direction of trading strategies.
The Impact of Oil Prices on the Canadian Dollar
By far the most impactful driver of the volatility of the Canadian Dollar is how tightly tied it is to oil prices. Figure 1 Petroleum is the largest export commodity for Canada. Furthermore, shocks to its prices affect the value of the Canadian dollar instantaneously. When oil prices are up, the Canadian Dollar appreciates in value. A decline in oil prices creates downward pressure on its value, leading it to depreciate.
Recent trends show that oil prices have remained relatively stable but are susceptible to shifts in both supply and demand dynamics globally. And yet today international markets are deeply affected by the war in Ukraine, U.S./China tensions, and OPEC’s production decisions. Canadian investors realize that any meaningful downturn in oil prices would further compound the Canadian Dollar’s current struggles.
The US, for its part, is maintaining its tariffs on Chinese imports. This decision puts Canadian oil on the back foot regarding demand and further complicates an economy heavily reliant on oil exports. It thus becomes imperative for traders to monitor what’s happening in the oil market and what’s transpiring with currency markets closely.
Future Outlook for the Canadian Dollar
Looking forward, analysts are hesitant to call for a quick rebound of the loonie. Nonetheless, these challenges seem set to persist for the beleaguered currency. That’s barring any material shifts in market fundamentals or optimistic data coming out of all Canada and the US.
The ongoing strength of the US Dollar is expected to persist, particularly as it capitalizes on recovering market sentiment following trade negotiations. Beginning Tuesday, US tariffs will be reduced from 145% to 30%. Such a cut has the potential to create a new wave of trickle down trade activity, lifting the fortunes of the American economy.
Barring a substantial rebound in oil prices or surprise strength in Canadian economic data, the CAD could stay on its back foot. The market remains deeply jittery, looking for any glimmer of hope that heralds a bottom being reached. At the same time, traders are bracing for bigger swings to come.