On Tuesday, the Canadian Dollar (CAD) experienced a dramatic rise against the US Dollar (USD). This action propelled the Loonie to multi-year highs against the Greenback. The CAD took off in the opposite direction, increasing by over a third of a percent. This unprecedented increase comes as a result of a perfect storm of economic forces and geopolitical tensions reshaping both countries. Through close trading ties, the US is Canada’s largest partner. The competitive influence of the US economic strength plays a huge role on the Canadian dollar value.
Of course the CAD has enjoyed an upward turn lately. This increase comes despite increasing worry about the Canadian economy, which is beginning to display signs of softening. In particular, analysts are looking to gauge the potential impact of a looming economic recession. They are closely monitoring the active US-China trade dispute. These factors, collectively, create a highly murky economic climate that may further impact the value of currencies going forward.
Economic Influences on the Canadian Dollar
Petroleum exports have become increasingly important to the Canadian economy since oil became the largest component of Canada’s exports. As a result, changes in oil prices usually result in an equally quick effect on the value of the CAD. Oil increases in recent months, rising oil prices helped to buoy the loonie. This newfound strength has assisted it in making headway against the troubled Greenback.
The aggregate economic indicators of the Canadian economy have recently started to trend downward. The April Canadian Ivey PMIs implied a noticeable drop in optimism on business conditions. This decline has set off alarm bells that the entire economic recovery could be in jeopardy. Given these headwinds, and in the face of such mixed signals, market participants are wary as to whether the CAD’s recent rally is sustainable.
Adding to the uncertainty are the continuing trade hostilities with the United States. Canadian Prime Minister Mark Carney and US President Trump at their joint press conference. They underscored glaring omissions from the trade wish list and called out the US for failing to put forth a clear ask. In our view, such geopolitical shifts will continue to be a driving force behind USD/CAD price action going forward.
Technical Analysis of CAD/USD
Technical trade charts on USD/CAD signal weak overall bullish formation. That said, Canadian Dollar still has a bullish bias for the time being. For the time being the USD/CAD pair shows no momentum at all. Traders are still waiting on the sidelines, looking for clearer signals before committing to any strong action. The pair now finds itself trapped just under the 200-day Exponential Moving Average (EMA) at just above 1.4000. This positioning means we may have higher volatility ahead.
Market analysts are stressing that technical indicators should be showing some bearish indicators. Geopolitical developments and the release of significant economic data will be key influences on the future trends for CAD vs CAD, especially in the near term. Traders, meanwhile, need to be watching oil prices very carefully. Much will depend on the performance of the US economy, which could change sentiment one way or the other.
As economic conditions evolve, both domestic and international investors will be keenly observing indicators that could lead to either a strengthening or weakening of the CAD. Moving forward, the relationship between trade negotiations and economic data will continue to be a key focus for markets.
Looking Ahead: Geopolitical Developments and Economic Forecasts
Recent events are about to make that geopolitical landscape very different. These events will be the leading catalysts of USD/CAD price action in the foreseeable future. Investors will be looking early on at how Canada manages its contentious and uncertain trade relationship with the US under a new Administration. A resolution or further tit-for-tat in the trade dispute would likely result in major moves in relative currency value.
Additionally, macroeconomic data releases will be important for setting expectations on each currency. Canada is preparing for a possible economic storm. A careful eye on the next few economic reports should show if the CAD is able to maintain its newfound strength or is instead battered by an ongoing decline in conditions.