The Canadian Dollar (CAD), Canada’s national currency, fell below 1.3700 against the U.S. Dollar (USD). This drop was largely driven by strong retail sales figures and continued inflationary pressures. The USD/CAD pair was last seen trading around 1.3685 in the early Asian hours on Monday. This two-dollar swing underscores the danger of how tightly tethered the Canadian economy is to the United States. Recent economic reports and political developments only serve to make this connection increasingly apparent.
The U.S. economic health strong affects the value of the Canadian Dollar. Canada is particularly hurt by this, given their reliance on the U.S. as a critical trading partner. When U.S. economic indicators change, Canadian currency tends to follow immediately. Now recent data on U.S. durable goods orders has put that idea in the spotlight. This new information has further confused Canada’s economic landscape.
Retail Sales Surge in November
Reversing the retreat of the previous month, Canada saw one of their biggest increases in retail sales in November, climbing by a full 1.7%. This increase is a notable rebound from last month’s drop of 0.6%. Retail sales are on the increase again, indicating strengthening economic activity for the Canadian economy. This is a sign of increasing consumer confidence and consumer behavior.
Even more important, the retail sales figures, excluding automobiles, were very strong. That’s a sure sign that Canadians are ready to open their wallets, despite wider economic jitters. This sudden jump in consumer spending may, in turn, cause ripples across the pond on the Canadian Dollar’s prospective value going forward.
“With that risk on the horizon, unless Canadian economic data really takes off, I think the Canadian dollar is stuck here. It will move with the broad dollar,”
- Aaron Hurd, senior portfolio manager in the currency group at State Street Global.
Oil Prices and Economic Influences
In fact, the value of the Canadian Dollar has been extremely correlated with oil price movements. This influence flows from the fact that petroleum is Canada’s bigger export. As the national currency, any fluctuation in oil prices will cause an instant and dramatic impact on the currency’s value. We know global demand is ever-evolving. This movement continues to shape the impact of oil prices on the Canadian economy, a change that is critically important to traders and policymakers alike.
On top of that, as with the Canadian Dollar, it tends to follow the larger movements of the U.S. dollar. The ongoing trade dynamics between Canada and the United States further complicate this relationship, particularly as negotiations over trade agreements continue to evolve.
Canada’s Prime Minister Mark Carney has taken his country’s intentions toward free trade with China very clear as well. This decision is a key factor in the continuing yen appreciation. The existing agreement between Canada and China has only resulted in reduced tariffs across select sectors, leaving many market observers questioning the long-term implications for Canadian trade and its currency.
Future Considerations and Economic Uncertainty
The promise of future positive economic developments is the main cause for caution among analysts tracking the Canadian Dollar’s path. In this regard, the outlook for Canadian economic data will be a huge factor in determining investor sentiment and currency valuations.
Tensions between Prime Minister Carney and U.S. President Trump only seem to be escalating. Market participants are understandably apprehensive, with the new round of negotiations over the United States-Mexico-Canada Agreement (USMCA) just around the corner. These negotiations could present further volatility for the Canadian Dollar.
“You have ongoing risk of tensions between Carney and Trump, the USMCA negotiations coming up this summer,”
- Aaron Hurd, senior portfolio manager in the currency group at State Street Global.