Make Kitco Your Homepage

Why Is the Canadian Dollar Weaker Than Other Major Currencies? USD/CAD Forecast

Commentaries & Views

The Canadian dollar stands as one of the world's major currencies that have experienced growth relative to the US dollar this year. But this hike is barely noticeable, placing the currency on the outskirts in this aspect. Let’s find out what’s wrong with the Canadian dollar version 23 and what prospects lie ahead for version 24.

The year 2023 started on a disappointing note for the US dollar, and this effect hasn’t faded away from the charts yet. What we mean is that many major currencies have outperformed the USD from the start of the year until now. However, the US dollar has experienced a resurgence over the past weeks. The CAD has seen some growth as well, but when compared to the other major currencies, it appears somewhat modest. 

A look at the chart shows that the Canadian dollar trails far behind the pound and the euro. Also, it’s a bit off on the DXY which is the US dollar index measuring the USD's performance against the basket of other major currencies.

Despite all hardships of the USD, the CAD has never surged higher than 1.31.

The Canadian dollar is unlikely to reach better rates in the short-term prospect. And here, we need to recap what boosted various currencies' growth against the USD. Since the autumn of 2022, investors expected that the Federal Reserve would start decreasing the interest rate. Apparently, the Fed was supposed to give up on its hawkish policy after all, prompting other leading central banks to raise their rates. Besides, post-pandemic China and other emerging markets could have exerted additional pressure on the USD.

But none of those expectations came true. The Federal Reserve has yet to halt the rate-hiking cycle. Other central banks are already thinking of easing their policy. And even China, a significant market that has abandoned its zero-Covid strategy, is experiencing sluggish growth.

The latter is especially significant in the context of the CAD. The Canadian dollar is a commodity currency, and China stands as a pivotal exporter within this region. When the Chinese economy falters, it eats into the CAD.

The current rate of the Canadian currency reflects the USD’s strength (bearing in mind its safe haven status) and concerns about the Chinese economy. Moreover, the USD and the CAD are linked because of the geographical proximity and their reliance on commodity-based economic ties. This results in relatively low volatility within this currency pair.

In other words, experts don’t expect significant fluctuations in the USD/CAD exchange rate shortly, most probably only by the end of 2023. However, the situation could evolve differently next year when the Fed has to drop its policy and, subsequently, the US economy may face recession.

This is why trading in USD/CAD (as with any other asset) requires careful analysis and ongoing monitoring of the latest news related to the US and Canadian economies.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.