H2 Currencies to Watch: A Deep Dive on the Canadian Dollar

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This is the first in a six-article series on what businesses need to know about a variety of global currencies in the second half of 2018. We'll be covering the Mexican Peso, the Australian Dollar, the Turkish Lira, the Euro, and more. Sign up for our weekly FX newsletter to get these articles sent straight to your inbox.

We launch our series with a deep dive on the Canadian dollar, with a special focus on the critical economic, financial market, and political events that impact the Canadian currency – and what those implications mean to global businesses.


Businesses, markets, and central bankers crave stability, so ongoing political uncertainty about tariffs, trade, NAFTA, and the economic impact of all three key macroeconomic issues normally destabilizes a country's currency.

Yet in the case of Canada - which is currently engaged with the Trump administration over trade and tariffs - the Canadian dollar (CAD) is holding up nicely going into the second half of 2018 amidst political turmoil.
 

First Half Uncertainty

Only a handful of months ago, talk of economic and currency stability spun Canada into peril, resulting in soft currency activity in the first quarter of 2018, thanks to roiling uncertainty over trade terms between the U.S. and Canada.

     The U.S. imposed higher tariffs
     on two key Canadian commodities
     - steel and aluminum - designed
     to hit Canada right in the pocketbook.

The second quarter of 2018 turned the volume upward on volatility, as the U.S. imposed higher tariffs on two key Canadian commodities - steel and aluminum - that sought to hit Canada (along with Mexico and the European Union) in the pocketbook.

To say that the Canadian government was irritated would be an understatement. Prime Minister Justin Trudeau threatened to return fire with tariffs on U.S. imports, pouring fuel on the fire in a burgeoning trade war between the two long-term allies.
 

The impact on Canadian economy and CAD

Other Articles in this Series

Leading politicians and economists expressed concern over the tariff spat; Bank of Canada deputy Governor Sylvain Leduc said the verbal volleys between the two governments weren't “conducive to a good environment". However, the impact of the trade and tariff exchanges are having little effect on the Canadian economy and the Canadian dollar. Why is that?

As usual, the numbers tell the story. Overall shipments of aluminum from Canada to the U.S. in 2017 amounted to approximately 2% of the country's total exports. Additionally, data from the Royal Bank of Canada noted that nationwide steel and aluminum comprised 0.5% of Canadian jobs and gross domestic product.

Overall, the Royal Bank of Canada (RBC) expects the Canadian economy, as measured by gross domestic product, to grow by 2% for 2018, with tariff and trade issues a negligible issue going forward.
 

Looking Forward at the Canadian Dollar

As the smoke clears on trade skirmishes—for now—between the U.S. and Canada, the Canadian currency is projected to remain stable for the duration of 2018.

The Canadian dollar is likely to hover at its current market range of 0.77 cents in 2018. In spite of rising oil prices, a recent widening in short-term interest rate differentials with the U.S., and concerns over trade negotiations have weighed heavily on the Canadian currency’s trajectory.
— Royal Bank of Canada

“Further protectionist policies from the Trump administration could lead to trouble down the road for the Canadian dollar", the RBC notes.

Pulling the lens back even more, the RBC expects ongoing trade volleys between the U.S. and Canada, Mexico, China, and the E.U. to have little impact on a burgeoning global economy.

“As the world economy comes to grips with the Trump administration's America-first policies, there is room for optimism," the RBC states. “Business investment trended higher last quarter and trade flow continues to be solid. There is also strong demand for workers in countries already operating at close to full employment."

Given these favorable conditions, RBC forecasts the world economy will expand by 3.9% in 2018.
 

The Business Takeaway

For the Canadian dollar, past seems to be prologue heading into the second half of the year.

“After a protracted period of softness through Q1, the past month has at least seen the CAD stabilize against the USD," notes ScotiaBank in a recent research in early June. “This has driven a fairly significant CAD out-performance on the crosses but we do think the CAD is overdue for a rise against the USD."

     Finance professionals should
     be mindful of ongoing trade
     renegotiations between the
     U.S. and Canada.

In its forecast, ScotiaBank cites recent “sharp improvement" on the Canadian trade front, along with an upward push on critical commodity prices. It anticipates a tightening on economic growth (with two interest rate hikes in the second half of 2018) and, in harmony with the RBC, calls for 2% GDP for the second half of 2018.

For businesses with cash flow exposure to the Canadian dollar, watching out for economic and political events will be critical. Finance professionals should be mindful of ongoing trade renegotiations between the U.S. and Canada as this could crimp the Canadian dollar's rise in the second half of the year. Although those negotiations have mostly been “baked into the cake" by the financial markets, even if the talks go sour, this isn't the time to rest on laurels.

Any new discussions, decisions, or disputes that occur could lead to volatility in either direction, affecting the bottom line of any businesses with exposure to the Canadian currency. Besides keeping a pulse on economic and political events (we'll be sure to keep you updated here), there are many actions finance professionals can take to counter balance unforeseen volatility: work with accurate FX data to manage foreign exchange exposures, forming risk management strategies, or optimizing corporate payments before currency headwinds obliterate potential profits.
 


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