The Canadian Dollar continues to push higher after recently coming within a hair’s breadth of six-month lows versus the US Dollar. This mostly encouraging trend comes against the backdrop of a potentially adverse economic reality. U.S. trade negotiations with Canada and the USMCA implementation, the general state of the U.S. economy, and inflationary pressures at home all impact this outlook. The recent economic landscape has created many different forces all impacting the value of the Canadian Dollar in different ways.
The local currency has been volatile largely due to its dependency on international trade, especially with the US. Being Canada’s single most important trading partner, announcements from these bilateral trade negotiations move the Canadian Dollar, potentially outweighing developments from across the country. Negotiations between Canadian Prime Minister Mark Carney and the US administration under recently inaugurated President Donald Trump have reached an impasse. This stalemate threatens to disrupt long-term trade patterns moving forward.
Economic Influences on the Canadian Dollar
Trade talks are just one factor in the dollar’s valuation. While further delays in negotiations have kept many participants in the market on their toes, optimism continues to be palpable about a possible re-entry into negotiations. Analysts think any significant movement in these negotiations could strengthen the Cad. That is particularly the case if it sets a positive precedent leading to better terms for Canadian exports.
At the same time, the overall health of the US economy is extremely important, since it will help shape the value of the Canadian Dollar. This is particularly important when considering the fact that Canada’s economy is very closely linked with the US economy. Thus, any indicators of expansion or recession in the US will directly affect Canadian markets. Traders are focused on high-frequency economic indicators from the US. They want to know if they should expect new signs of major changes in US monetary policy that would affect exchange rates.
Canada’s own economic conditions play into the strength of its currency. The inflation rate in Canada is 2.4% year-over-year as of last month. This rate is just over the Bank of Canada’s target upper band of 2.0%. Achieving this milestone has spurred predictions about what the Bank of Canada will do with interest rates next. Rate traders are now completely pricing in a 25 bp cut as early as January. That’s assuming the Federal Reserve does hold its ground and raises interest rates by 25 basis points at the early December meeting.
The Role of Oil Prices and Trade Balance
Considering that petroleum is the largest Canadian export, it makes sense that oil prices should have an immediate and sizable effect on the Canadian Dollar. The long-term impacts of recent swings in global oil prices has re-awoken a storm of currency exchange market fluctuations. Further, if oil prices were to increase significantly the Canadian Dollar may appreciate. Higher export revenues from oil will improve Canada’s current account balance.
The value of Canada’s exports minus the value of their imports is another driver (or influencer) of currency valuation. All else being equal, a positive trade balance is supportive of a stronger dollar and a negative trade balance adds to depreciation pressure on the dollar. Currency market analysts are scrutinizing trade numbers with an eye towards how they will impact future currency flows.
Right now, a closing drop under the 1.4000 threshold may lead to a deeper retreat. This might see the currency duo fall to 1.3950. On the flip side, regained momentum above 1.4140 might reassert upside dominance, with 1.4200 eyed as USD/CAD target. The technical indicators are extremely glaring. The 50-day exponential moving average (EMA) is just below 1.3950, while the 200-day EMA is close to 1.3900 and both are positively aligned. This technical alignment points to a continuation of the larger bullish momentum for the Canadian Dollar going forward.
Future Prospects and Market Sentiment
Expectations for the Canadian Dollar going forward are moderately positive in spite of short-term hurdles. Most market participants understand that non-market factors such as US economic performance and global oil prices are paramount. At the same time, they become attuned to domestic economic signs. The possibility for a Bank of Canada rate cut further clouds market forecasts.
The sentiment behind trade negotiations is still a huge factor affecting the market. Should discussions between Canada and the United States resume positively, it could reinvigorate confidence in the Canadian Dollar, leading to potential gains against its US counterpart.