The CAD and trade

Mercantilists never have to worry about being right. The percentage of the U.S. trade deficit accounted for by Canada rose in the early 90s while the CAD weakened slightly. The percentage fell sharply in advance of the CAD’s 1997-1998 breaks. It rose again into 2001 while the CAD both rose and fell. It declined steadily since then, well before the CAD’s recent strength.

In other words, there does not appear to be any sort of predictive relationship between the CAD and U.S.-Canada bilateral trade. There are several reasons for this. First, much of U.S. Canada trade is inter-subsidiary, such as within the automobile industry, or occurs within price-inelastic goods such as energy and minerals. In addition, long-term currency hedging is used frequently on both sides of the border. As a result, currency movements may affect certain profit margins, but are notably ineffective in affecting macro trade flows.