Canada and the U.S. enjoy the largest bilateral trade relationship in the world -- $1.23 trillion in bilateral trade and investment, which is more than $100 billion more than the U.S.- China trade relationship and five times larger than the Australia and China relationship. The Canadian and Australian economies share some similarities in that they both have an abundance of natural resources and have similar-sized economies.

However, we are beginning to see a divergence between the two countries. Anyone who pumps gas is fully aware of the nearly 50% drop in oil prices since last summer.  What most consumers are not aware of is that iron ore and copper prices have also fallen by similar margins and the glut of oil and weak demand is causing large layoffs in the energy industries.  Iron ore in particular continues to remain at six-year lows

Once the Great Recession began and demand for cheap steel from China declined sharply, an enormous impact was felt in Australia. Australian trade surpluses turned to deficits, pressuring and keeping the Australian dollar pinned down. Just this past week, the 4th largest iron ore supplier in Australia suspended operations.

Meanwhile, Canada which is primarily an oil exporter and much less involved with iron ore, has seen its currency stabilize as oil prices appear to have bottomed for now.  In fact, oil hit the highest levels of the year this week.

Also this week, the Bank of Canada met and left rates unchanged, although there was some expectation in the markets that the bank would cut rates again.  The Canadian central bank surprised markets in January when it cut rates against expectations of keeping rates on hold. 

Markets are now shifting their expectations on the path of rates for Canada after this week’s meeting, and while no one expects the Bank of Canada to raise rates this year, the question of lower rates is much more uncertain now.

Our View: This is a reminder that markets work in cycles, almost always not in any apparent coordination with each other.  It will always be this way, and we have to learn to live within those market parameters.

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