One of the most often asked questions we get on the FX desk these days has to do with the Canadian dollar, particularly from our entertainment clients who have production interests there. The Canadian dollar has depreciated nearly 12% this year against the U.S. dollar with a good deal of that coming in the last two months.  This has been one of the surprises for the market this year.  Dollar strength against the euro and Japanese yen was somewhat expected, but the persistent and increasing weakness in commodities that has taken the air out of the Canadian dollar was unexpected.

But there is a silver lining for Canada and a conversely dark cloud for the U.S. out of this development, and that is the effect it is having on trade between the two countries.  We noted a couple of months ago that the U.S. and Canada represent the largest bilateral trade relationship in the world, a fact that is surprising for many. 

This is a story fueled by the exchange rate between the “greenback” and the “loonie” – which is the financial slang term used for the Canadian dollar coming from the name of the bird on the $1 Canadian coin. The most recent numbers came out on Wednesday. 

  • The U.S. trade deficit with the rest of the world for June rose to $43.8 billion from $40.5 billion in May. 
  • Canada’s merchandise trade deficit for the same month with the rest of the world narrowed to $0.5 billion (Canadian dollars) from C$3.4 billion in May. 

Both numbers were a bit of a surprise to the markets.  Ignoring the rest of the world for the moment, the bilateral deficit that the U.S. has with Canada worsened by U.S. $3.1 billion.  So that means, if you are making a product that you hope to export to Canada – it will be more expensive for them to import and people might be less likely to buy your product.

My View: Going forward, we expect commodities to remain subdued, as global demand may be increasing, but at a very slow rate.  For the most part this comes back to the Fed, as the question of U.S. short-term rate liftoff has become the one key macroeconomic variable that seems to be driving markets.  I still think a 25 bp hike is in store, which will put even more upward, though mild, pressure on the U.S. dollar against its Canadian counterpart.

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