The Canadian Dollar extended its gains against the US Dollar, driven by both internal and external factors.
Domestically, December’s trade balance showed a significant improvement, registering a surplus of CAD 708 million, the first since early 2024. Exports rose by 4.9%, led by energy products.
Additionally, the depreciation of the Canadian dollar has boosted the valuation of exports.
However, the annual trade deficit widened to CAD 7.2 billion in 2024, as imports growth outpaced exports over the year.
Meanwhile, the US remains a key trading partner, accounting for 76% of Canadian exports and 62% of imports.
Given current global trade tensions, this dependency adds complexity to the Canadian dollar’s future trajectory.
Additionally, January’s S&P Global Services PMI registered a modest rise to 49 points but remained in contraction territory for a second consecutive month. Uncertain market conditions and a sharp decline in new export business weighed on overall performance.
Externally, developments in the U.S. may favor the Canadian dollar in the short term. The ISM Services PMI unexpectedly declined. If markets interpret this as a sign of a dovish shift by the Federal Reserve, the U.S. dollar could face selling pressure, giving the Canadian dollar room to strengthen.
Looking ahead, ongoing global trade tensions and the upcoming US Nonfarm Payrolls report could cloud the outlook for the Loonie. Strong NFP numbers, particularly after today’s ADP report figures, could reinforce expectations of a resilient U.S. labor market and favor the greenback, placing selling pressure on the Canadian currency.
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