USD/CAD Loonie Shrugs Off Largest Canadian Trade Deficit

The Canadian dollar continues to advance versus the U.S. dollar even as both nations delivered worse than expected trade deficits. The Canadian trade balance was expected to improve from the disappointing 2.2 billion deficit with a forecast of 800 million. The actual release shocked markets with a larger than expected 3 billion in March. This is the worst ever trade balance with the only positive being the larger volumes of both imports and exports. The previous record was 2.87 billion in July 2012. Statistics Canada also made a downward revision to the previous month release which now stands at 2.2 billion after it had reported 984 million which is what set the expectations so high.

The American trade balance also delivered a higher than expected deficit as the trade gap grew to a six year high. The Federal Reserve is right to be cautions about the effects of a strong USD and the rise of imports validates their concerns. The net between exports and imports leaves the American deficit at -51.4 billion, the largest since October 2008. Lower demand for energy products is another factor that pushed imported goods over exports.

The USD/CAD appreciated after both trade balances were announced only for the USD to give back all the gains and fall through the 1.21 level. The USD has been on the back foot versus all major currency pairs as economic data continues to disappoint. The boost that the buck had enjoyed from interest rate divergence diminished as the first rate hike does not seem to be in the near future as originally expected. Even though Fed members continue to mention the June rate hike as “on the table” economic reality shows that it would be premature given the negative impact of the so called transitory effects of the winter weather and energy supply glut are having on the economy.

The Canadian dollar is rising on the back of the selloff of the USD, but after the political uncertainty in the United Kingdom end with Thursday’s elections the focus will be on the U.S. employment picture. The nonfarm payrolls will be released at the same time as the Canadian employment data and can provide a further boost for the loonie to continue flying high, or bring it back to reality if the U.S. manages to improve on a disappointing March print.

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza