The loonie couldn’t capitalize on this momentum and quickly fell back around 1.6150 vs the Euro. This decline was largely due to declining oil prices and rising US crude inventories. Petroleum is Canada’s largest export by dollar value, and thus critical to the Canadian economy. Its importance greatly impacts the CAD because it acts as a commodity-linked currency. West Texas Intermediate (WTI) crude oil prices are down to about $60.40 per barrel after increasing for four consecutive days. Market analysts are concerned about what this drop may mean for the Canadian economy.
Beyond the back-and-forth tea-drinking between Moscow and Kyiv, a couple of new factors in US-EU relations might shape how well the CAD does. The good news is that US President Donald Trump just announced his intention to tighten tariffs on European goods, which would shake things up positively. As Canada maintains a robust trading relationship with the United States—the largest importer of Canadian crude oil—the health of the US economy remains a significant factor affecting the CAD’s value.
Impact of Oil Prices on the Canadian Economy
And it’s hard to overstate how much Canada’s economy is tied to its petroleum exports. As such, oil prices are extremely important in dictating the strength of the CAD. Predictably, Canada is the pre-eminent crude oil exporter to the United States. Consequently, changes in the price of oil are immediately reflected in the value of the Canadian dollar. As WTI oil prices fell, economists warned that a continued slide would test the CAD’s resilience.
Oil prices fell sharply on Tuesday as US crude stocks jumped by the most in almost three decades. Last week, these inventories rose by nearly 3 million barrels. This rapid rise suggests a fundamental oversupply in the market, raising fears of downward pressure on demand and eventually falling oil prices. For our neighbor to the north, the loss of revenue from oil exports would be a painful prospect, likely pulling the CAD down with it.
Additionally, with falling oil prices, analysts are already predicting that this trend could put downward pressure on the CAD. Speculators typically respond to these shifts by moving in and out of positions which often exacerbates the volatility by increasing the shock in currency markets. As a result, the Canadian Dollar is likely to find it difficult to gain traction if oil prices remain depressed.
The Relationship Between US Economic Health and the CAD
The US economy is deeply connected to the performance of the Canadian Dollar. The United States is by far Canada’s largest trading partner. Economic indicators from the U.S. have an almost immediate effect on Canadian exports and can influence the strength of the Canadian dollar. A healthy US economy usually strengthens demand for Canadian exports, leading to a stronger CAD.
For now all eyes turn to Canada’s Retail Sales data, due out Friday. Analysts are expecting Retail Sales to be up 1.2% in November after a 0.2% drop in October. A positive retail sales report could enhance market sentiment around the CAD as it may indicate resilience in consumer spending, further supporting the currency’s value.
If the retail data disappoints, this would be bad news for the CAD. Declining oil prices and increasing US inventories will only increase these challenges. Meaning investors will be watching these indicators like hawks as they look for risks to watch for or opportunities to seize in the currency markets.
Easing US-EU Tensions and Its Effects
Recent progress on US-EU relations has added a new layer of complexity to the environment surrounding the CAD. President Trump has lately signaled a desire to roll back tariffs on goods from European countries. This action is expected to improve overall US-EU trade relations. This de-escalation could improve confidence in worldwide markets and improve investor sentiment.
What this change means for Canada in particular is still unclear. Stronger US-EU relations would provide a significant jolt to global trade new dynamics. Given how much Canada depends on the good graces of its American neighbor, the country needs to judge any silver lining in that light. Canada is critical to trade on the entire North American continent. Because of this, any change in trade policy or economic climate on the other side of the border can greatly affect its economy.
Furthermore, President Trump’s remarks regarding forming “the framework of a future deal regarding Greenland” suggest ongoing negotiations that could alter trade dynamics further. While these new relationships help position Canada as it continues down its own economic path, market participants will certainly be watching closely.