Canadian Dollar Forecast: USD/CAD Highs Drives Tesla Price Increase

Canadian Dollar, USD/CAD, Tesla Talking Points:

• The USD/CAD breakout has brought a ripple effect and this morning showed another impact as Tesla raised prices across their product line for Canada, as reported by Reuters the increases would range from C$4,000 to C$9,000 depending on make and model.
• A weak currency can bring on inflation which could then compel the Central Bank to cut rates. But at this point Canadian policy makers seem more concerned with tariff potential from newly-inaugurated President Trump, which has helped to drive the massive breakout in USD/CAD.
• Over the weekend I looked at the technical backdrop for the USD/CAD pair, highlighting a key level of resistance just overhead at 1.4500. The first test of that price in four years brought a strong sell-off, but the response to that, so far, has been bullish as buyers have held higher-lows since Monday while defending the 1.4300 area on the chart.

Indices AD

Currencies matter, and for many traders or even market technicians, the impact is often not completely understood. But we saw another form of that this morning when Reuters published a report announcing that Tesla would increases prices on their product lines in Canada from as low as C$4,000 to as much as C$9,000. Much of the commentary on social media seemed to point the finger at Tesla, alleging greed as the reason behind the move. But realistically, it just takes one glance at the chart to understand the ‘why.’ It’s not that Tesla wanted to punish Canadians, but more that they want to make money (their entire reason for existing as a public company to begin with).

First and foremost, to establish a basis, a public company’s primary goal is profit, or ‘shareholder value,’ to use a technical term. And the executives of that company have a fiduciary duty to their shareholders to try to extract as much long-term value as possible. That’s simply the structure of a publicly-traded corporate operation. So, if an exchange rate changes so much that a company’s profit margin is completely evaporated, and they end up taking a net loss on each unit sold rather than a profit, well that’s not good, and it probably won’t last for long.

In the video above and the simple diagram below, I use some real exchange rates with some hypothetical numbers for simplicity’s sake. But let’s say that the average selling price for a Tesla vehicle at the start of Q4, 2024 is $40,000 U.S. Dollars, and with an exchange rate of 1.3500, that would mean that Tesla could chart C$54,000 for the same car to be sold in Canada. At that point, the C$54,000 in Canada would yield the same sales revenue of $40,000 U.S. Dollars.

USD/CAD Monthly Chart

Now, let’s assume that Tesla has a net profit margin of 5%, which is untrue, as Tesla’s margins are a little higher and that’s one of the reasons their stock commands a premium valuation in the marketplace; but for autos in general, 5% net profit margin seems to be around average, so we’re going to go with that in this hypothetical example.

So, for every $40,000 USD car sold, whether it’s sold in Canada or the United States, Tesla would be making a net profit of $2,000 per car. And that $2,000 profit would be the same for Canada, as well, since Tesla does not make cars in Canada, their main North American factories are in California and Texas and while they do ship units from foreign factories in Shanghai to Canada, we’re going to keep it simple for our example’s sake.

If Tesla has a $2,000 profit margin per car selling for $40,000 each, that will mean a total cost to build, ship and sell each car of $38,000. And with an exchange rate in USD/CAD at 1.3500, Tesla would want to sell as many cars as possible because that would mean, for each unit sold, $2,000 in profit for ‘shareholder value.’

USD/CAD Monthly Chart

There’s but one problem – and that’s what happened earlier this week. USD/CAD spiked up to a fresh four-year-high at 1.4500 and now, all the sudden, the math is askew.

With Tesla’s selling price of C$54,000, a profit margin was evident at a spot exchange rate of 1.3500. But now, at 1.4500, that profit margin has gone away and then some.

For each unit that Tesla sells at C$54,000 in Canada, they’re now bringing back to the U.S. only $37,241.38. This doesn’t even cover the $38,000 cost to build, ship and sell the car, so Tesla’s profit has completely evaporated, and they’re now losing a whopping $758.62 for every car sold in Canada.

They did nothing wrong here, they’re selling the same car for the same price and it costs them the same amount to build and ship it:  What’s changed here is the exchange rate, and Tesla is now losing money on every car sold using our hypothetical example.

What is Tesla going to do, keeping selling cars to lose money? They wouldn’t make sense, and that wouldn’t echo the premium valuation in the marketplace that the company has become known for. No, they’re probably going to raise prices to offset that weaker currency, and now we have a push point for inflation in Canada.

USD/CAD Monthly Chart

The Seeds of Inflation

With Tesla raising prices on autos sold in Canada, other auto manufacturers probably take notice, and see that as an open opportunity to do the same. And before you know it, we now have inflation in autos, a very important segment of any developed economy and that’s something that can play through to other products and services.

But – again – the root here was a weak currency, brought upon by a dovish Central Bank and the threat of tariffs that’s pushed USD/CAD to fresh four-year-highs.

How does this change? Well, the Central Bank will likely need to manage inflation if it continues, and this is where rate hikes can come into the equation. Higher rates can help to attract capital into Canada again, which could then be invested in the Canadian economy. But until that happens this weakness in the currency presents a massive vulnerability.

There’s another impact here, and that’s on foreign producers operating in Canada. For Tesla this makes selling cars a bigger challenge because now they’re selling at new, higher prices. So, likely, that will mean fewer cars sold, at least until competitors similarly raise prices to offset the exchange rate weakness. And as that happens, if inflation is filtering through other areas of the economy, it’s more difficult for Canadians to buy cars so, another headwind appears.

On net – a breakout of this magnitude in a currency pair like USD/CAD isn’t great for Americans or Canadians, and if equity market strength is the priority then, likely, it’s stability in currencies that would be wanted. This is all reason why I expect to see mean reversion at work in USD/CAD at some point this year but, that point does not appear to be here, yet, as the pair has held higher-low support after it’s first test of the 1.4500 handle since the Covid pandemic.

USD/CAD Technical Analysis

While the longer-term range still retains potential the shorter-term trend remains bullish in nature. I had looked at USD/CAD in the weekend article, highlighting the importance of the 1.4500 level and that came into play on Tuesday and was quickly followed by a 200-pip sell-off.

But it’s the response that sell-off that retains a bullish bias as, so far, bulls have held the line of support around the 1.4300 handle, and, as of this writing, it’s been higher-lows every day since Monday. That keeps the door open for another test of 1.4500 and if bulls can ultimately take that out, the 20-year-highs around 1.4668 and 1.4690 are next obvious points of reference on the chart.

For shorter-term bears, or for longer-term mean-reversion themes, perhaps the one item of excitement is the resistance showing on the underside of the bullish trendline taken from September and December lows. If bears can hold a higher-low and produce a lower-low before another 1.4500 test, the door for a stronger retracement can begin to open. But that would still be very early stage and it’s the 1.4200 level that I would likely to see bears re-claim as indication that they may be able to draw a deeper bout of longer-term mean-reversion in the pair.

USD/CAD Daily Price Chart

--- written by James Stanley, Senior Strategist