With Bank of Canada Governor Tiff Macklem suggesting that interest rates may have peaked, and Federal Reserve Bank of Atlanta President Raphael Bostic expressing more confidence in the continued decline of inflation over the next year, it appears we’ve turned a corner in the historic fight against inflation. So, how will the Canadian dollar fare against the US Dollar once the Bank of Canada (BoC) and other central banks in developed economies start to cut rates? How will the Canadian dollar perform against the USD in 2024?
This largely depends on the extent and speed of the BoC’s rate cuts compared to those of the Federal Reserve (Fed). Investors, both short-term and long-term, tend to gravitate towards currencies offering higher interest rate returns, taking advantage of interest rate differentials. Most analysts predict that the BoC will be a leader in rate cuts, but the Fed is expected to take a similar path.
More broadly speaking, in a low-interest-rate environment, the yield or returns on traditional, low-risk investments, such as government bonds and other safe-haven assets like the US Dollar, typically decrease. This scenario prompts investors to “search for yield” by moving their capital to assets with potentially higher returns, albeit accompanied by higher risks. These assets can include higher-return currencies such as the Canadian dollar, high-yield bonds, or even alternative investments.
In addition, if major economies successfully navigate a soft landing, it could lead to increased cross-border investment flows into riskier markets and sectors, bolstered by an improvement in global investor confidence, benefiting the Canadian Dollar as compared to the US Dollar.
All this suggests that the Canadian dollar, as a high-yielding currency with an export-driven economy, stands to gain in 2024 versus the US dollar. Most currency analysts predict the Canadian dollar to be in the 1.31 to 1.29 (USD/CAD) range, with the more aggressive predictions placing it below 1.27 (USD/CAD). Either way, 2024 looks like it will bring a stronger Canadian Dollar.
The Canadian dollar is currently trading at 1.3576 CAD against the US Dollar.
