America’s lucrative trade relationship with Canada is showing signs of stress. Since that promise, President Donald Trump has threatened unprecedented tariffs on Canadian fertilizer. Such a move would have far-reaching implications for the ag sector. Secondly, it puts pressure on the price of the Canadian Dollar, which is significantly influenced by the overall health of the US economy. As of this writing, the most recent tick on the USD/CAD currency pair was up 0.18%. It hit an all-time high of 1.3851, a sign of the continued volatility in the value of currencies.
The Canadian Dollar, abbreviated as CAD, is Canada’s native currency. Its value is further impacted by the United States, Canada’s largest trading partner. Today, a single tweet from President Trump can immediately move the exchange rate for the Canadian Dollar. Such a dynamic relationship is behind some of the big swings of currency values. This is critically needed at this moment. President’s remarks regarding possible new tariffs on fertilizer imports threaten to create added volatility in the foreign exchange market.
Economic Interdependence
Canada’s economy depends on its exports, with petroleum being its top export commodity. Upward or downward shifts in oil prices often directly affect the exchange rate of the Canadian Dollar. These shifts create a significant and tangible effect on its value right away. The more crude oil prices increase or decrease, the more demand for money called the Canadian Dollar. As Canada’s largest export, a stronger oil market is generally positive for the CAD, while falling oil prices can be a negative catalyst.
These tariffs by President Trump, which are still in limbo, most directly target the steel and aluminum industries. They threaten Canada’s long-term economic prosperity. Trade is complex and deeply interconnected. When the agricultural sector is hit with a challenge, it sends a domino effect through other sectors and defines Canada’s overall economic landscape.
“A lot of (fertilizer) does come in from Canada, and so we’ll end up putting very severe tariffs on that, if we have to, because that’s the way you want to bolster here.” – US President Donald Trump
Impact of US Statements
Statements like those by President Trump have left their mark on market sentiment and currency valuation in the time since his inauguration. When he announces new potential tariffs or trade barriers, it introduces friction and uncertainty into the market that makes investors and market participants antsy. Just look what happens to the value of the Canadian Dollar immediately following such announcements as markets react to fears over Canadian-US trade relations.
The ongoing debacle highlights just how vulnerable the Canadian Dollar is to outside shocks. Half of Canada’s economy comes from exports, with a recent strong focus on petroleum and agricultural products. As soon as tariffs are announced, traders respond almost immediately, increasing demand for the CAD. If indeed tariffs are imposed, that may reduce demand for the Canadian Dollar since investment sentiment will become bearish.
Looking Ahead
As trade negotiations play out and political posturing develops, the Canadian and American economies are, and will continue to be, inextricably linked. That’s why market analysts are eyeing President Trump’s proposed stimulus and trade measures with great interest. They’re looking at what it might mean for fertilizer imports and for wider trade relations. The longer-term implications for the Canadian Dollar depend on how these tariffs, if implemented, will impact exports and economic growth.
Looking ahead, the CAD’s performance will remain closely tied to a rebound in oil prices and general improvements in Canada’s trade relations with the US. The interaction between these three elements is the key. Stakeholders in both countries should be vigilant about changes to trade policies.