The Canadian dollar is holding steady at around a four-and-a-half-month high against the US dollar on Wednesday morning. The Canadian dollar has gained over 5 cents since November and 2.5 cents in the last week against the US dollar.
The primary driver of the Canadian dollar’s strength is the projected interest rate differentials that investors are anticipating based on messaging from the Bank of Canada and the Federal Reserve. Last week, the Fed made a clear and somewhat unexpected ‘pivot’ to a more dovish (favoring lower interest rates) stance, allowing markets to price in a more aggressive rate cut path in 2024. In Canada, however, the economic data and the messaging from the Bank of Canada (BoC) present a more conflicted picture. The latest Canadian inflation numbers released on Tuesday surprised on the upside and remained steady at 3.1%. Analysts had anticipated an inflation figure of 2.9%. Meanwhile, Bank of Canada Governor Tiff Macklem said in an interview on Monday that he expects rates to be cut next year.
Analysts are suggesting that the comments by BoC Governor Macklem are more about aligning with the Fed and less about economic fundamentals. Overall, the Canadian dollar is likely to continue benefiting from a lower interest rate environment compared to that of the US dollar and is expected to be in the low 1.30’s by the end of the 1st quarter in 2024.
The Canadian dollar is currently trading at 1.3325 CAD against the US Dollar.
