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USD to CAD: The Impact of Global Trade Uncertainty

USD to CAD volatility has been relatively limited this year. But things have recently heated up with pair’s exchange rate on somewhat of a roller coaster ride.

Exchange rate risk: USD to CAD
Exchange rate risk: USD to CAD

On good days, when a trade deal appears on track, the Canadian dollar tends to rise. But on bad days, when the trade war appears to be only in the early innings, Canada’s currency often falls.  

That’s because global commerce developments loom large for Canada’s economy, one that relies heavily on its resource exports as a leading growth engine.

Canada’s dollar, one of the year’s highest-flying major currencies, has wavered as global trade friction casts a shadow over the global economy. Canada’s dollar has outperformed of late, helped by its central bank’s hesitancy so far to follow in the footsteps of other central banks that have either cut interest rates or signaled a willingness to do so.

Canada’s currency has been supported by signs of a revival in local growth after a slowdown in late 2018. Inflation around the Bank of Canada’s 2% goal and historically low unemployment below 6% have allowed policymakers to hold their main rate at 1.75% since October 2018.

By contrast, America’s Federal Reserve in July cut interest rates for the first time in more than a decade.

USD to CAD volatility has been relatively limited this year. But things have recently heated up with pair’s exchange rate on somewhat of a roller coaster ride. The shift has businesses who held off against hedging this year now considering reducing the risk to their bottom line. Learn How Currency Hedging Works.

Exchange rate risk: USD to CAD

As Canada’s economy gained traction and the Fed cut rates, the USD to CAD slumped to nine-month lows in July. The rally in the Canadian currency abated as the trade war between the world’s two largest economies unexpectedly escalated. As a result, Canada’s dollar soon found itself in its biggest hole in seven weeks.

The Bank of Canada in July acknowledged that an escalation of trade conflicts remains the biggest downside risk to the global and Canadian outlooks. In August, President Trump proposed increasing tariffs. Beijing responded by allowing its currency, the yuan, to cross a politically sensitive level of 7 against the dollar.

A dimmer outlook for global growth would bode poorly for Canada given how its economy depends on trade as a leading driver of growth. Moreover, a weaker global outlook would risk depressing the price of oil, one of Canada’s prized exports.

With a possible trade war to flare over the short-term, what can companies do to minimize risks to their bottom line? Businesses could put the focus on things that they can control. Enacting a risk management strategy can help maintain (steady) cash flow in the midst of a volatile period. Taking steps now can help avoid turmoil in in this increasingly uncertain time.