Trade tensions and the Canadian dollar

Canadian dollar struggles amid trade talks

Canada faces multiple economic challenges, including an increasingly uncertain trade environment. With a change in U.S. leadership, Canada might face new trade restrictions, such as tariffs.

Historically, trade tensions, such as those experienced in 2018, have seen temporary tariffs on specific products used as a negotiation tactic before being lifted. It is expected that, as in past negotiations, both countries will eventually reach a deal, but any tariff disputes in the meantime may temporarily reduce exports and hinder investment, impacting overall economic growth warns Farm Credit Canada, Economics.

The uncertain economic outlook also raises concerns about the Canadian dollar. Although a weaker currency can benefit Canada's export-driven economy, it increases the cost of imports and travel to the U.S. While historically, the Loonie's value has been tied to oil prices, this connection has weakened in recent years.

Despite higher oil prices and similar interest rate differentials compared to 2007, the Canadian dollar is trading much lower—at around 70 U.S. cents, compared to 90 cents. This suggests that factors beyond oil prices and interest rate differences are contributing to the Loonie's underperformance, making a significant rebound unlikely in the short term cautions FCC.

It says, the overall outlook for the Canadian economy remains cautious, with ongoing trade negotiations and currency instability shaping its future trajectory.

Figure: The correlation between the Loonie and oil has weakened over the last three years.