Canada is an important North American country that borders the US to the north. The country’s landmass of 3.855 million square miles is bigger than that of the US, which is 3,797 million square miles. However, most of Canada is unhabitable because it is in the Arctic Circle. The country has a population of more than 37 million people while the US has a population of more than 440 million people. The Canadian dollar is often known as loonie.
Starting from May this year, the Canadian dollar has ben gaining against the US dollar. This is after the Federal Reserve signaled that it will start slashing interest rates as the ongoing trade war weighs in on the market. On the other hand, the Canadian economy has continued being relatively strong. As a result, the country’s central bank has resisted the international pressure to slash rates or offer stimulus.
The dovish pressure is real. As mentioned, in the US, the Fed has indicated that it will slash interest rates. In Europe, the ECB has signaled that interest rates will remain at these lows for a longer period than earlier anticipated. The bank has also signaled that it could restart the quantitative easing program that was halted in December. In Australia, the central bank has slashed rates twice and in China, the PBOC is in the process of offering stimulus.
Another reason why the loonie has been gaining is because of the USMCA deal that was negotiated by the Trump administration. While Trump criticized NAFTA as the worst trade deal in the world, the new USMCA deal is not different. The country of origin rule says that that automobile companies must have 75% of all their components manufactured in the three countries to qualify for zero percent tariff. This is higher than the current 62.5%. USMCA also introduced new labor provisions, which said that workers earning at least 16% per hour must make 40% to 45% of auto parts by 2023. In addition, Canada agreed to open its dairy industry to the Mexico and U.S. There were other provisions in the deal such as the digital taxes.
As the Fed moves to lower rates, the US dollar could ease, which will provide an important support to the resource-rich Canada. The country is endowed by a number of resources like lumber, crude oil, coal, and other agricultural products. As commodity prices rise, the Canadian dollar tends to rise as well. However, the rise of the Canadian dollar could lead to calls by the BOC to slash rates. This is because a weak local currency usually supports exports.