It would not surprise many people that the United States largest trade partner is China. They are on the other side of almost 16% of total trade with the US. What seems to surprise many people is that Canada is right behind them in total trade at 15% and it is also our largest export market, swallowing up 18.3% of all goods and services that leave the United States. This relationship makes the USD/CAD exchange rate very important in the day to day life of most Americans and should be on your trading radar.
When you open your Nadex trading platform and click on “Forex Binaries” or “Forex Spreads”, the 8th one down the list of 10 is the USD/CAD. Clicking on a chart of USD/CAD you will see that the Canadian dollar has fallen almost 2.3% in only 6 days and 7.5% since the low on May 3rd of last year. What is behind the weakness?
The US Fed has been hinting at rate hikes since 2015 but has only executed 2 hikes of .25% (both in December of their respective years). This past week, it seems, they got serious. Lael Brainard, a Fed Governor know as a dove said, ““We are closing in on full employment, inflation is moving gradually toward our target, foreign growth is on more solid footing, and risks to the outlook are as close to balanced as they have been in some time,” Fed Vice-Chair Stanley Fischer said, “We’ve seen a lot of substantial change in a relatively short time, there is almost no economic indicator that has come in badly in the last three months.” Dallas Federal Reserve President Robert Kaplan (voting member and more neutral) said that the next hike would come “sooner rather than later.” When asked what this meant during a Monday Q&A, he said he meant that the next hike would take place “in the near future.” Most importantly, Fed Chair Janet Yellen gave unusually clear guidance saying that as long as the economy evolved in line with the Fed’s expectations, “a further adjustment of the federal funds rate would likely be appropriate…at our upcoming meetings.” The odds of a March rate hike jumped from under 20% to almost 80% last week.
This all happened in the same week that the Bank of Canada left rates unchanged even though Canadian CPI rose to 2.1%. The BOC attributes this to “carbon pricing measures introduced in two provinces. The Bank is looking through these effects, as their impact on inflation will be temporary. The Bank’s three measures of core inflation, taken together, continue to point to material excess capacity in the economy.”
Also long as the Central Bank of are largest neighbor is headed in the opposite direction of the US Fed, look for long dollar, short Canadian dollar to remain the trend.