Canadian Prime Minister Mark Carney announced that the long-standing economic partnership between Canada and the US has come to an end. He explained that this change marks a significant shift in how both countries will engage with each other economically. The USD/CAD exchange rate fell by 0.02%, trading at 1.3990. This adjustment reflects how changing trade relations impact the Canadian Dollar.

Factors Influencing the Canadian Dollar

The Canadian Dollar’s value is affected by a few key things, including interest rates set by the Bank of Canada, oil prices, and the overall health of Canada’s economy. Other important factors include the trade balance, inflation rates, and various economic indicators. When the Bank of Canada alters interest rates, it directly impacts the Canadian Dollar. Higher interest rates can increase the CAD’s value by attracting foreign investments, while quantitative easing tends to weaken it. Oil prices play a crucial role in the value of the Canadian Dollar, given that oil is a major export for Canada. Changes in oil prices often link closely with fluctuations in the CAD, impacting trade balances in different ways. Economic data, such as GDP and jobs reports, are also vital for CAD valuation. Strong economic reports can strengthen the CAD by attracting more investments and possibly leading to higher interest rates.

Market Reaction to New Trade Relations

The Prime Minister’s announcement indicates a major change, suggesting that we might see increased volatility in the Canadian dollar. The market’s initial calm reaction below 1.4000 may be short-lived as traders adjust to this major break from tradition. Buying options could be a good strategy to profit from the expected price fluctuations. This political shift corresponds with recent economic data, enhancing its credibility. Statistics Canada noted last week that US exports fell by 3.5% in the third quarter of 2025, following the US’s new ‘reciprocity tariffs’. The CBOE/CME FX Canadian Dollar Volatility Index (CVCAD) reached a two-year high this morning, indicating that the options market is preparing for changes. With the US making up over 70% of Canada’s trade, this major change is likely negative for the CAD. We can anticipate a weaker Canadian dollar against the US dollar in the coming weeks, with a sustained move above the 1.4000 mark appearing more likely. This prediction is bolstered by the expected response from the Bank of Canada. Last month, the BoC maintained its overnight rate at 4.25%, highlighting “growing uncertainty in global trade patterns” as a significant risk. Any economic fallout from this political shift will probably lead the central bank to adopt a more lenient approach, putting further pressure on the currency. Additionally, the price of oil, which usually supports the CAD, may not provide as much aid this time. The difference between Western Canadian Select and WTI crude has widened to over $20 a barrel. This reflects concerns about pipeline capacity and access to US refineries, weakening the connection between rising global oil prices and a stronger Canadian dollar. In 2018, we observed a similar, though less dramatic, increase in CAD volatility during the NAFTA renegotiation into the USMCA. However, the current language is much harsher, describing a “rupture” instead of a renegotiation. This indicates that upcoming market movements could be larger and last longer than what we saw previously. Create your live VT Markets account and start trading now.

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