The Canadian Dollar (CAD) started off June on a particularly strong note against the US Dollar (USD). It made a corresponding new six-month high in Loonie offers at that point intraday. This positive trend is a promising sign to kick off June. It follows a short-lived test of six-month lows earlier on Monday. The CAD’s resilience is closely tied to oil prices, which remain pivotal to Canada’s economy given that petroleum is the nation’s largest export.
Market participants were following the movements very, very closely. In turn, this drove the Canadian Dollar to close at its strongest exchange rate against the Greenback since last Fall. USD/CAD currency pair the stage for more downside. This is a big signal that the market dynamics have turned against OPEC+ and are favorable to the Canadian dollar.
Tariff Concerns Weigh on US Dollar
This recent swell in the Canadian Dollar’s fortunes comes in the backdrop of increased concern over protectionist US trade policy under the Trump administration. Reports indicate that President Trump is preparing to impose an arbitrary deadline for trading partners to present their best offers in trade negotiations. The deadline is currently scheduled for this Wednesday. Their trading partners need to be held accountable, or else risk having the same reciprocal tariffs that were removed, re-imposed on them.
“The Trump administration is reportedly preparing to tell trading partners” – FXStreet
Shortly, past administration’s aggressive tariff policy stance has halted trade negotiations creating a “window of uncertainty.” A “black Swan” result will dramatically hurt the US Dollar. Of all these actions, the one announced by Trump to double tariffs on all steel imports—from 25% to 50%—is most remarkable. The US, as a major importer of steel, will probably just have to suffer the higher costs, enough to add even more stress to a faltering economy.
Beyond these tariff actions, the ongoing legal battle over Trump’s tariffs could muddy the waters even more. On July 14, 2021, the US Court of International Trade ruled. It asked the federal appeals court to suspend Trump’s massive tariffs while a lower court’s decision is being appealed. Given already strained trade relations and a dimming economic forecast, this latest legal tussle is another complication for the unfolding trade war.
Impact of Oil Prices on the Canadian Economy
The health of the Loonie is linked very closely to the price of oil and overall natural resource plays. Petroleum exports are a lifeblood for Canada’s economy. As oil prices go up or down, the CAD rises or falls in value against other currencies. When oil prices increase, so too does demand for the Canadian Dollar. This increase tends to increase its worth.
Today, the CAD’s price action reflects the prevailing mood in the wider market. This feeling is influenced by a combination of homegrown concerns and the international economic context. Economists observe that if oil prices are steady or increasing, the strength of the Canadian Dollar improves. That sets it up with a great prospect to maintain its value against the Greenback long term.
“The Canadian Dollar briefly tested fresh six-month lows on Monday, kicking off the June trading month on a high note.” – FXStreet
Traders pay close attention to oil price movements and how they affect the CAD. The general feeling is that if oil does keep rallying, that will give the Canadian dollar more upside support.
Economic Factors Influencing Currency Movements
These two issues, oil prices and tariff concerns, aren’t the only factors at play. Other Canadian and US economic indicators play a powerful role in driving currency fluctuations. Of course, the health of the US economy, seen as Canada’s largest trading partner, will always be a huge factor in deciding CAD’s performance.
Though the CAD has staged impressive recent advances, analysts argue that the Greenback is defending an area of strong support. Given these circumstances, they help to keep the USD/CAD stable, floating just above 1.3700 for now. The CAD has regained upward momentum, reflecting signs of short term stability. An even greater challenge awaits that could undermine its positive impact.
Traders should keep a close eye on the next steps in U.S.-China trade negotiations and U.S. tariff policy. They’ll be watching the dynamic of changing oil prices as these economic trends develop. It’s this balancing act between all of these factors that will eventually determine the direction of the Canadian Dollar over the next few weeks.