The Canadian dollar has experienced significant fluctuations in recent months, driven by a complex interplay of economic and geopolitical factors. To help us navigate this, Bill Kellett, Managing Director & Head of Currencies at ATB Capital Markets, provides critical insights into these market dynamics and offers guidance on managing currency risk.

The Wild Ride of the Canadian Dollar

According to Kellett, the primary drivers of the Canadian dollar's volatility have been tariffs and the evolving policies of the US administration. However, other critical factors are at play. "We also need to look at (the) geopolitical risk that is out there," Kellett notes. "The world is not in the most stable place at this moment." Additionally, domestic factors like productivity and GDP per capita have contributed to the Canadian dollar's devaluation.

What's Driving the CAD?

Several key factors are influencing the CAD:

• Global Geopolitical Risk: Instability is fueling market volatility and investor uncertainty.
• US Tariff Threats: The potential for US tariffs continues to loom over Canada's economy, affecting trade and investment.
• Commodity Prices (Oil & Gas): Fluctuations in oil and gas, vital to Canada's economy, are directly impacting the CAD.
• Automotive Sector: The Canadian auto industry, closely tied to the US, is facing ongoing challenges.
• Cross-Border Trade Uncertainty: Concerns about US trade are creating market volatility.
• Interest Rate Differentials: The widening gap between Canadian and US interest rates is driving the CAD downward.

Managing Currency Risk: A Key Business Imperative

Kellett emphasizes the importance of understanding and managing currency risk for businesses of all sizes. "Currency risk can arise in many different ways for businesses or investors," he explains, citing accounts payable/receivable, foreign operations, and overseas investments as examples.

He advocates for hedging as a primary risk mitigation tool, highlighting its ability to provide businesses with certainty and allow them to focus on core operations. "[Hedging] allows you to understand and manage your cash flow. It allows you to focus on running your business in the way that you know best. And most importantly, it could end up saving you a tremendous amount of money for your business,” says Kellett.