Over the past few weeks, the Canadian dollar has lost significant value when compared to the US dollar. Below are the primary reasons for this decline:
Geopolitical Turmoil: The recent conflict in the Middle East has significantly suppressed the global appetite for risk. This adversely impacts currencies like Canada’s that are more dependent on a thriving and stable global economy. When investors feel uneasy or uncertain, they tend to pull out of the Canadian dollar and gravitate towards the US dollar.
Global Bond Disruption: Rising yields in U.S. Treasury bonds make them more attractive to investors worldwide. Since these bonds are denominated in U.S. dollars, an increase in demand for them boosts the demand for the U.S. dollar. Consequently, the U.S. dollar strengthens against other currencies.
Canada-US Economic Disparity: Canada’s economic ties to the US usually mean that the GDP growth rates of both countries align closely. However, Q3 saw the U.S. GDP surge at an annual rate of 4.9%, while Canada’s economy approached contraction. Such a discrepancy has been historically rare, with only two significant gaps noted before the COVID era.
Economic Pressures in Canada: Canadian consumers, who are highly indebted and burdened by rising borrowing costs, are cutting back on their spending. The housing sector, sensitive to interest rate fluctuations and representing a significant portion of Canada’s GDP, is a prominent challenge for the Canadian economy. Conversely, the U.S. fiscal policy, with its budget deficit of $1.7 trillion, is energizing both consumers and the US economy. This indicates that interest rates are likely to stay higher for a more extended period in the US than in Canada.
While many market analysts expect the Canadian dollar to experience some rebound by mid-2024, we expect a challenging November and December for the Canadian Dollar.
The Canadian dollar is currently trading at 1.3795 CAD against the US Dollar.
