It might be useful to take a step back and review the performance of USD to CAD during the pandemic. Prior to the pandemic, the exchange rate was roughly at 1.30. At the height of the panic, the demand for the relative safe- haven of US-dollar denominated assets shot up and the exchange rate reached as high as 1.43 in mid May of 2020. Then the unprecedented central bank stimulus in the form of asset purchases and near 0 interest rates began to take hold and as the panic subsided into general uncertainty, the US dollar traded down to its pre-pandemic levels by September of 2020. Since then, monetary stimulus along with fiscal help has caused a strong v-shaped recovery to take hold which most people could not have predicted at the onset of the crisis. With that recovery, the value of the US dollar has further declined and risk currencies like the Canadian dollar have gained. Most recently, strong commodity prices as well as hawkish messaging from the Bank of Canada have further strengthened the Loonie such that the US dollar is now trading at its lowest level against its Canadian counterpart since September of 2017. Where we go from here will depend much on when and if the Bank of Canada and the US Federal Reserve continue to hold on to their divergent views or whether they amend their messaging to be closer to one another. For example, yesterday, Janet Yellen, the former Fed Chairman and current Treasury Secretary suggested that rates would go up in the US sooner than expected and that led to a temporary jump in the value of the US dollar. She later corrected to state that she was expressing her personal views. Today, Tiff Macklem was expected to appear a parlimatery committee but that appearance has been cancelled. Regardless, the single most important factor for the exchange rate in the near future will be market perceptions as to when each bank will move to rein in stimulus and move rates.
