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Is Canadian Dollar Strengthening or the US Dollar Sputtering?

Canadian dollar

With the Canadian dollar closing in on a 7-week high against the US Dollar it’s worth asking if it’s the Lonnie is gaining strength or the US dollar sputtering?   As is the case in life, the truth lies somewhere in the middle.

Currently the US dollar to Canadian Dollar exchange rate is sitting at 1.2535 (CAD to USD 0.7977).

The end of a historic US Dollar Rally?

Over the last year the combination of the Fed’s interest tightening, Stock Market volatility and a flight to safety as are result of the conflict in Europe has been a trifecta for the US dollar,  pushing the US dollar to multi-decade highs against many of its G10 counter parts.  The latest round of economic news out of the US ,however, has been more negative.  This combined with the fact a higher US dollar has reduced the profit margins for some the largest US based multinational corporations means that the Fed’s path forward maybe more limited than what was previously thought.

The Case for a Strengthening Canadian Dollar

The fact that the Bank of Canada increased its overnight lending rate by 50 pips on June 1st was not surprising to anyone, but what analyst were surprised by was the veracity of the BoC’s language.  In their statement after announcing the interest rate hike BoC officials stated that that they would “act more forcefully if needed’, it’s rare to hear such strong language from a central bank.  In the end much of the BoC’s messaging may turn out to be bluster as the speed and level of interest rates hikes will ultimately be determined by how the Canadian economy in general and the housing sector specifically reacts to higher interest rates.  But for the time being economist are forecasting that the Bank of Canada will raise rates to 3.25% or about 40 basis points more than the US Federal Reserve bank.  This will continue to make the Canadian dollar a more attractive investment relative to the USD dollar.

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