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Outside of the US-UK movements towards anti-globalism over the past decade, Canada and Europe have remained committed to global trade and climate issues. This isn’t to say confidence is sky high, nor that the trade relationship between the two has been all that consistent.
The CADEUR rate peaked in Q3 of 2022 at 0.77 due to aggressive rate hikes from the Bank of Canada during the summer, where they were much faster to react than the European Central Bank. The interest rate differential became the widest in 20 years, reaching 250 basis points in Canada’s favour. If nothing else, it showed that there is little coordination between them and raised concerns about whether the ECB has its hands tied due to Greece and Italy’s high debt risks.
However, high oil and gas prices have been the undercurrent of most economic stories since 2022, and it's no different to the CAD/EUR pairing. Being rich in natural resources, Canada benefited from the high oil and gas prices, while Europe, which was previously dependent on Russia, became a high-paying importer.
EUR recovery and recent performance
Since this Q3 2022 peak, the Euro has been steadily recovering due to the interest rate differential decreasing (ECB belatedly rose rates, while BoC has begun cutting), as well as declining oil prices. CADEUR is today priced at 0.67, which is a mild and relative strength against the Euro, down from a peak strength of 0.77.
Since the start of November, CADEUR has strengthened from 0.6599 to 0.6757 and has experienced slightly elevated volatility. CAD has shown resilience and its short-term upward movement signals a strengthening trend against the Euro. However, both currencies have fallen against the USD, which was in part ignited by Trump’s victory – it’s just the Euro was hit harder, falling from 1.09 to 1.05 in nine days.
The trade relationship between Canada and Europe
After the US and China, the EU is Canada’s third largest trading partner. For the EU, Canada is the 10th largest partner for exports, and 16th largest for imports. On the face of it, Europe appears to be more important to Canada than Canada is to Europe, and thus a strengthening of CADEUR helps Canada more than it hurts Europe. A net gain, perhaps.
The bilateral trade reached a record high of $100 billion in 2021. Of this, Canadian exports to the EU accounted for one-third of this sum, while two-thirds came in the opposite direction. However, these numbers do not tell the whole story because of the contents of the trade.
Cars and vans are one of Europe’s most important exports, and Canada buys around $5 billion of them each year. However, after the recent announcement of the top 20 most sold electric vehicles, it’s clear Europe’s influence on the industry is fading. The list is made up of mostly Chinese cars and Tesla, with Volkswagen being the only European car to make the cut.
This may be an area where trade slows into Canada, even if the CAD continues to strengthen against the Euro. The European automobile industry may become more of a luxury export market, and the stronger CAD is hardly relevant for a price-inelastic good like luxury cars.
In the opposite direction, Europe may lean more towards Canada as part of its energy diversification plan. After the disastrous Nord Stream Pipe 2, the EU claims it wants to trade “with more predictable and stable energy partners” to avoid malicious disruptions. Although the US became a hugely important exporter of energy, there may be some trepidation over the Trump victory and its stipulated America-first tariffs. This may be even more problematic due to the US dollar strengthening over the Euro more than the CAD has, leaving Canada as a reliable alternative.
Europe’s push towards securing critical raw materials and minerals has also led to ore, slag and ash exports from Canada to the EU growing 106% from 2016 to 2020, making it now the largest export in that direction at $3.51 billion.
Macroeconomic implications
Europe is currently in a precarious situation where it’s feeling far more vulnerable than Canada. Many of its core industries are on the decline due to a fundamental lack of technological progress, yet is made even worse by its rising energy costs and waning currency.
Perhaps more of a threat is the conflict in Ukraine, which Europe wants to continue supporting, but its relied-upon NATO partner, the US, has lots of unsupportive rhetoric in the Trump administration. At best, Europe will have to fork out more in military funding to keep Trump happy. At worst, it will need to develop its own self-sufficient military strategy at a time when the would-be frontrunner candidate, Macron, is on his way out (and potentially replaced by someone far less interested in European sovereignty). Kickstarting the necessary defense industry would be impossibly expensive, too, though it has begun, and Canada could grow its role as a supplier.
For the net importers, Canada will benefit from a slightly cheaper Euro to help offset domestic inflation. Although some industries are under threat in Europe, Canada still imports plenty of energy, showing energy dependence isn’t just one way, as well as pharmaceutical products and nuclear reactors from Europe.
This highlights that in these difficult times, the relationship between Canada and Europe is only growing more important. Canada can become a relied-upon stable alternative to the US in the event of a trade war, which Macron is warning Europe of. Canada and Europe can also benefit from a more stable currency relationship than their US counterparts, where the US only grows stronger whatever the time frame you use to measure it.
This opinion piece has been written exclusively for CEO.ca by Adam Lowerson.
The material is intended solely for informational purposes and should not be used as a basis for trading, business, financial, legal, accounting, tax, or other professional advice.
Reproduction of this article, in whole or in part, is strictly prohibited without the author’s explicit permission.
