Canadian Dollar Trading: US Economic Growth Takes Center Stage

US DOLLAR, CANADIAN DOLLAR, US-CANADA TRADE RELATIONSHIP, UNDERSTANDING THE CORE-PERIMETER MODEL – TALKING POINTS

  • How to trade the Canadian Dollar against the US Dollar
  • What are the US-Canada trade, economic relations and why do they matter?
  • How the relationship between Canada and the US fits into the Core-Perimeter model

When the global economic growth outlook is positive, Canadian assets tend to become more attractive than safer US counterparts because their cycle sensitivity – while making them riskier – allows for comparatively higher returns. This typically results in a weaker USD/CAD exchange rate because investors are valuing yield over stability.

US-CANADA TRADE RELATIONS

The US is not only Canada’s largest trading partner but also the world’s biggest consumer-driven economy. This internally-oriented growth model makes the US less vulnerable to external shocks relative to a more outward-facing economy like Canada, which strongly relies on exports southward to drive performance. For perspective, over 74% of Canada’s cross-border sales are to the US market, whereas the latter only sends about 12 percent of its total exports to the former.

United States Market: A Key Destination for Canadian Exports (2018)

Chart showing US-Canada trade

A positive backdrop for US growth typically boosts demand for Canadian goods and the total volume of trade between the core and perimeter expands. As exports flow from the perimeter to the core, capital pours in the opposite direction and helps push the Canadian Dollar higher.

This dynamic is amplified by capital rushing into the perimeter economy from investors looking for cycle-channeling CAD-denominated assets to deliver comparatively more generous returns. Under these conditions, the USD/CAD exchange rate typically falls.

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