The Canadian Dollar: A Look at the Future
By Fergal Smith
TORONTO (Reuters) – The Canadian dollar is poised for a rally against the U.S. dollar in the coming year, driven by lower borrowing costs that will boost the domestic economy. However, the outcome of the U.S. presidential election could introduce uncertainty into this forecast, according to a recent Reuters poll.
Analysts’ Projections
- The median forecast of 40 foreign exchange analysts suggests that the Canadian dollar will strengthen by 2.4% to 1.36 per U.S. dollar, or 73.53 U.S. cents, by end-January.
- Over the course of a year, the currency is expected to advance 5.5% to 1.32.
Factors Driving the Forecast
“Our forecast for a stronger Canadian dollar is based on the fact that the Fed should catch up in its interest rate cutting cycle and the Canadian economy should recover quite strongly as the Bank of Canada cuts rates,” said Kyle Chapman, FX markets analyst at Ballinger Group in London.
Bank of Canada Governor Tiff Macklem recently mentioned that the central bank is starting to see the impact of its easing measures on the economy. The BoC has cut its benchmark interest rate by one and a quarter percentage points since early June to 3.75%.
Canada’s economy is highly sensitive to interest rate levels due to a short mortgage cycle and high household debt. Household debt in Canada was recorded at 184% of net disposable income in 2023, the highest among G7 countries, according to OECD data.
Market Performance and Potential Risks
The Canadian dollar saw a 3% decline in October, marking its largest monthly drop since September 2022. On Thursday, it hit a near three-month low at 1.3945.
One potential risk factor for the currency is the outcome of the U.S. presidential election. Republican candidate Donald Trump has proposed significant tariffs on imported goods, a move that could impact Canadian exports given that about 75% of Canada’s exports go to the United States.
“The election is a fork in the road … If we get a Trump presidency then perhaps the recovery wouldn’t be nearly as strong as we’re expecting right now,” Chapman added.
Other Stories from the November Reuters Foreign Exchange Poll
Analysis
The forecast for the Canadian dollar’s strengthening against the U.S. dollar presents both opportunities and risks for investors and consumers alike. Here’s a breakdown of how this projection could impact various aspects of the economy:
Investors:
- A stronger Canadian dollar could potentially boost returns for investors holding Canadian assets denominated in foreign currencies.
- Conversely, it may pose challenges for exporters who rely heavily on a weaker currency to remain competitive in international markets.
Consumers:
- For consumers, a stronger Canadian dollar could lead to lower prices on imported goods, making foreign products more affordable.
- However, it could also result in higher prices for Canadian exports, affecting industries that depend on international trade.
Overall, the trajectory of the Canadian dollar in relation to the U.S. dollar is a key indicator of economic health and global market dynamics. Keeping a close eye on currency forecasts can help individuals and businesses make informed decisions about investments, purchases, and financial planning.