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Covering the USD–CAD Spread

Will Canadian expansion make companies loony for the loonie?

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Things are looking upbeat for Canada’s economy after a few years of difficulty. That is good news for the nation overall, but the trend may eliminate the trade advantage Canada has enjoyed due to its weak currency.

With the new budget that was unveiled last week, Canada is fresh off its third consecutive year of trade surpluses. One major reason for the nation’s favorable trade balance is the low value of the Canadian dollar relative to other currencies. The U.S. dollar and Canadian dollar were nearly at parity in 2012, but when global commodities markets took a nosedive, major producers like Canada were hit hard. As demand slowed for the energy-heavy exports that Canada provides the rest of the world, the value of the Canadian dollar, or “loonie,” also slipped.

The Canadian economy has turned around since then. Commodity prices have rebounded, restoring Canada’s ailing trade balance, and Prime Minister Justin Trudeau has promised policies that would help continue this growth. Soaring markets in the United States—one of Canada’s primary trading partners—have also helped. The Federal Reserve’s March interest rate increase of 25 basis points indicates that the Fed expects further growth in the U.S. economy in the near future. And as the U.S. goes, so goes Canada, generally.

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