CNS Canada — Usually when the Canadian dollar starts to drop lower than its U.S. counterpart it’s good for producers — but this time not so much.
Along with the drop, commodity prices have also dropped.
“Unfortunately I’m not so sure that what we’ve seen in terms of a decline in the Canadian dollar versus the U.S. dollar is really enough to compensate for some of the disruption trade disputes are going to bring when it comes to commodity prices,” said J.P. Gervais, chief agriculture economist for Farm Credit Canada.
The Canadian dollar has been trending lower lately as trade disputes around the world rage on. Over the course of the week ended Friday, the dollar dropped around half a cent in value.
Uncertainty over the future of the North American Free Trade Agreement (NAFTA) has pressured the currency, while a tit-for-tat trade dispute between the U.S. and China has dragged the Chicago Board of Trade soybean market lower.
According to Shaun Osborne, chief forex strategist with Scotiabank, the trade uncertainties have investors feeling weary of the Canadian economy which is leading them to shy away from the Canadian dollar.
“The bottom line is, until we get some clarity on NAFTA it’s going to be difficult for the Canadian dollar to strengthen materially at least,” he said.
However, Osborne does think there are signs that the Canadian dollar is starting to stabilize. Investors now have the potential end of NAFTA priced into the currency’s value, which is helping.
“I think a lot of bad news is priced in. We’re priced for some of the worst outcomes that we can imagine from a trade point of view,” he said.
There is, however, the possibility that world economic growth could be slowed, if the tariffs that countries have announced are implemented.
Those tariffs “can slow down a number of things and for the Canadian economy I think it would slow down as well,” Gervais said.
The weaker Canadian dollar and trade situation have reduced the probability that the Bank of Canada will raise its benchmark interest rate. The probability of a rate hike in July is now at around 50 per cent.
“I think there’s still a case for somewhat higher rates in Canada, not aggressively so, but it’s difficult, important rather, not to rule out I think the interim risks of a rate increase potentially,” Osborne said.