Over the last week, the Canadian dollar has gone from 1.38 against the USD to its current rate of 1.3443. This is the largest one-week gain for the Loonie (CAD) since November. What is causing the Canadian dollar to strengthen against its US counterpart?
Yes, some of the gains made by the Canadian dollar have to do with general US dollar weakness, and the move away from safe-haven assets after what appears to be the end of the banking crisis. The Canadian dollar has also benefited from higher oil prices. But in our opinion, what’s really powering the rise of the Canadian dollar against the US dollar is a complete 180-degree turn in interest rate expectations by the Fed and, more importantly, the Bank of Canada.
As little as two weeks ago, the Federal Reserve Bank was seen as having no choice but to aggressively push forward with interest rate increases, while the Bank of Canada had paused its cycle of interest rate hikes, and the debate was around when they would cut rates.
Since then, the banking crisis in the US, along with last Friday’s lower-than-expected Core Personal Consumption (PCE) Index, which is a key measure of inflationary pressures, has helped make a strong case that the Fed will more than likely pause at its next meeting in May. At the same time, a string of strong economic data in Canada, such as an increase in retail sales, followed by Friday’s higher-than-expected GDP number, has analysts betting that the BoC will be forced to restart its interest rate increases.
