Canadian dollar falls on fears of US protectionism

Although the Bank of Canada (BoC) left its overnight rate unchanged at 0.5% as expected on Wednesday, BoC Governor Stephen Poloz also said that “a rate cut remains on the table,” which helped prompt a sharp fall for the Canadian dollar.

The central bank also stated that US President-elect Donald Trump’s expected protectionist trade stance would have a significantly negative impact on the Canadian economy, but that it would hold off on a rate cut for the time being amid considerable uncertainties ahead of the new US president entering office.

Components of the anticipated Trump-style protectionism that are most relevant to Canada’s economy would be Trump’s threats of a sizable border tax and the US renegotiation of or withdrawal from the North American Free Trade Agreement (NAFTA). Canada is heavily dependent on trade with the US, and US trade policy is consequently critical to the Canadian economy.

With the BoC hinting at a future rate cut that would be tied in part to trade policies of the incoming US administration, the Canadian dollar took a significant hit just as the US dollar rebounded after several days spent within a sharp pullback. The combination of a surging US dollar and sliding Canadian dollar helped boost USD/CAD well off major psychological support around the 1.3000 handle. The 1.3000 level has served as key support for at least the past four months as USD/CAD has bounced in a trading range between 1.3000 and 1.3600.

Aside from the Bank of Canada, crude oil prices also play an important role in Canadian dollar movement. Fears that increased US oil production could mitigate the effects of the recent OPEC deal to cut oil production have recently been weighing on crude oil prices. If this continues to be the case, the Canadian dollar could be pressured even further. In the event that the 1.3000 level continues to hold, an extended bounce within the current trading range could push USD/CAD back up to target range resistance around the noted 1.3600 level.

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