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The Canadian Dollar: the Most Fundamentally Troubled Major

The Canadian Dollar: the Most Fundamentally Troubled Major

What's on this page

Talking Points:

  • While currencies like the Dollar, Euro and Yen have consolidated despite clear risks, the Canadian Dollar has won little respite
  • Oil prices have held buoyant, but Canada's benefit has been curbed due to the glut of the commodity and a record US output
  • Now, protectionism is the Canadian Dollar's greatest risk with NAFTA renegotiations and US tariffs which will exact broader pressure

See how retail traders are positioning in USD/CAD, other CAD Crosses and major currencies afflicted by a variety of fundamental troubles on the DailyFX Sentiment page.

The Canadian Dollar's Tumble Indicates Something is Amiss

Even if you weren't up to speed on the fundamental themes direction the markets, you would still be able to tell something serious is weighing the Canadian Dollar. The currency has suffered material losses against currencies whose influence is generally far more prolific yet have favored consolidation rather than trend: such as USD/CAD, GBP/CAD and EUR/CAD. The former surpassed 1.2900 in clearance of a remarkable resistance while the likes of EUR/USD, GBP/USD and USD/JPY remain anchored. For EUR/CAD, the Italian election and its results kept investors uncertain about the future while the ECB decision kept them from speculative; yet this particular pair charged to fresh multi-year highs. And, the Brexit-tied Sterling wouldn't prevent GBP/CAD from clearing resistance and shooting higher.

Daily Chart of Equally-Weighted Canadian Dollar Index

A Magnet for Fundamental Pain

The Canadian Dollar has been a magnet for prominent issue these past weeks and months. While there are a number of inherent and local issues, the global problems are far more troublesome. It began in earnest with commodities. Though the price of many natural resources the country ships have risen, the appetite for Canada's exports have not necessarily kept pace. A good example is oil. Where the country is a profound exporter of the commodity and the largest foreign source for the United States, that particular trade partner has ramped up its own domestic production which has influenced the dynamic. A greater issue is the rise of protectionism - trade oriented countries rarely win in such situation. The re-negotiation of NAFTA has been ongoing for some time, and those conducting the discussions have reported slow or little progress. This has grown far more burdensome with the recent tariffs announced by US President Donald Trump. A 25 percent tariff on all steel imports and 10 percent for all aluminum into the US is perhaps targeted at particularly flagrant rule breakers, but they most prominently hurt Canada who is the United States' largest supplier of both.

Probability of a 25 Basis Point Rate Hike by Major Central Banks

The Scenarios Do Not Look Good

If we weigh the outlook for these various issues and events, the are certainly various paths we may take. Yet, few of the optimistic courses that may be trekked are encouraging for the Loonie or foriegn investment are encouraging. Will demand for the country's exports suddenly surge from current levels because trade remarkable opens up or the global economy suddenly hits a stride? That would seem to contradict the motivation of protectionism and is therefore very unlikely. With President Trump stating explicitly that Canada can avoid some of the bite of steel tariffs if they bend on NAFTA negotiations, it seems that the country is being in a position to lose a little or lose a lot, but its trade partners are intent that it loses. The only recourse that the Canadian Dollar may have is the already significant depreciation it has suffered. Over the past months, it has accelerated its sharp decline and subsequently discounted a considerable amount of pain. But, it is enough to make it a 'bargain' despite its issues?

Daily Chart of USD/CAD

Pairs to Watch

When evaluating a specific currency, I think it is valuable to evaluate it trade-weighted value but also to evaluate an prominent equally-weighted index. That gives insight into its value against higher yield, better safe havens, more dependent trade countries, larger and smaller economies, etc. The technical picture of a trade-weighted CAD is not pretty. For the USD/CAD, the 1.2900 breakout looks tame in comparison. EUR/CAD and GBP/CAD are more exceptional for their sense of escalation. CAD/JPY is accelerating an already extant tumble. Perhaps the pairs that balance out competing themes the best are AUD/CAD and NZD/CAD. First appreciate the overall picture and then selection options among the pairs where they are most prominent. We focus on the Canadian Dollar in today's Quick Take Video.

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.