Politics

What Is The Fate Of The CAD With NAFTA On The Ropes And Oil Prices Sliding?

Economic and political relations between the US and Canada are among the most stable in the world. These two titans of trade enjoy a peaceful border, near-identical value systems, and prosperous economies. This naturally lends itself to stability on the currency trading front. The USD/CAD currency pair is currently trading at 1.3680 (+0.0431%) as at Tuesday, May 2, 2017. The 52-week trading range of the pair is 1.2461 on the low end, and 1.3697 on the high-end.

Canadian Dollar CAD
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Canadian Dollar

US President Donald J. Trump recently cautioned that if the US was unable to get a better deal with NAFTA that he would tear up the agreement. However, he has since softened his stance and agreed to work with the Canadians and the Mexicans on a negotiated deal that would be more beneficial to the US. Every time Trump tweets about NAFTA being bad for the US, the USD/CAD pair rallies. However, he’s proving to be more bark than bite and the CAD is stabilizing somewhat against the greenback.

The Canadian economy, much like the Australian economy, is heavily reliant on commodities and exports. In fact, some 85% of all Canadian exports move south into the United States, and many of those exports are comprised of crude oil and petroleum products. According to Statista, Canada ranks fifth in terms of global crude oil production at 4.9%, behind China (4.9%), Russia (12.4%), the US (13%) and Saudi Arabia (13%).

Commodities Experts Looking to the Future for Crude Oil Price Growth

Canada has been facing increasing pressure from the mass exodus of global oil companies from its shores. However, the Canadians have not been deterred by this, owing to the rising presence of domestic oil companies in Canada. In 2017, international energy companies divested $22.5 billion in assets from the Canadian oil sands. There were many reasons for the massive selloff, including carbon emissions, low oil prices, limited access to the markets via the pipeline and the high costs of producing crude oil.

Canadian oil companies are bullish on prospects for crude oil in 2017, regardless of the sharp contractions in the industry. For starters, cost savings are likely with automation and bitumen solvents for drilling purposes. This will drive up profits, strengthen the CAD and result in a reversal in the USD/CAD pair.

The price of crude oil is directly correlated with the strength of the CAD. Therefore, there is an inverse relationship between oil prices and the USD/CAD pair.

The Performance of the Canadian Economy

The Canadian economy is increasingly moving towards automation for economic stimulus and productivity. The Bank of Canada (BOC) has assuaged concerns that robots and artificial intelligence are taking over, by calling for an acceptance of automation and the opportunities created by robots. For Canadians to prosper on a personal level, the economy needs to undergo a paradigm shift.

The BOC advises caution for money management during periods of slow-growth, with things like taking responsibility for maintaining lines of credit for personal and business usage. With creditors clamping down on clients, and multinational corporations divesting from Canada’s primary commodity market, consumer confidence needs to remain high for the economy to hit its straps.

Automation is perceived to be the driver of growth that the economy needs. According to the Bank of Canada, growth has slumbered since the early 2000’s. Had economic growth (GDP growth) in Canada continued at the pace set in the 1990s, the average Canadian citizen would be $13,000 better off by today standards.

It is largely due to underproductive economic performance that Canada is facing weakness on multiple fronts today. The BOC advocates against isolationism, and embraces ongoing learning to foster growth with the new Canadian economy. On a personal front, this certainly presents challenges as monetary tightening remains the order of the day. Currently, the Bank of Canada is holding the interest rate steady at 0.5%, and this rate has remained that way for well over a year. Monetary accommodation is designed to kickstart the Canadian economy.