The Canadian dollar fell just shy of hitting a month-low on Wednesday after the credit rating agency Fitch downgraded the US government’s credit rating from its highest AAA rating to the second highest AA+. The announcement resulted in a noticeable cascade throughout the financial system. Everything from equities to cryptocurrencies, and perhaps most significantly for the Canadian dollar, oil prices, lost value. Investors quickly moved to dump risky assets such as the Canadian dollar for safe-haven assets like the US dollar. Although it may seem counterintuitive for investors to invest in US dollars just as the US government’s creditworthiness has come into question, financial uncertainty and stress will always, at least initially, result in greater demand for the US dollar.
For those selling US dollars, this might be an opportunity to sell, especially when a Reuters poll released on Thursday indicated that the Canadian dollar is expected to strengthen to 1.31 in the next 6 months and to 1.29 in the next year. The logic here is nothing new; the Federal Reserve is close to, if not at, its terminal rate and most likely will begin reversing course in the first half of 2024.