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USD to CAD Update: Why is the Canadian dollar declining all of a sudden?

The US dollar has jumped 1.3% since yesterday afternoon and is now trading at its highest level against the Canadian dollar in nearly 7 weeks.  The move comes as the US Federal Reserve delivered a message that indicated more readiness to rein in monetary stimulus than the market expected.  USD to CAD is now at 1.233.  That message brought the US central bank closer to the position of the Bank of Canada which had jumped in front of its peers in projecting reduced asset purchases and rate hikes.  The Bank of Canada’s aggressive posture relative to other central banks had made the Loonie more attractive to investors and has been a major driver of Canadian dollar strength for the last few months.  The Fed’s announcements yesterday remove that relative advantage for the Canadian currency.  First, the Fed raised its expectations for US inflation and GDP growth for this year.  Second, Fed members now sees 2 rate hikes in 2023 whereas previously they expected none until 2024.  While that is not an formal forecast, it does represent the views of the people around the table at the Fed.  Finally Chairman Jerome Powell said officials had begun a discussion about scaling back bond purchases (or “tapering” of monetary stimulus).   The Loonie’s run over the last few months has also been supported by strong oil prices and general optimism about global economic recovery.  Those factors remain in place and will mitigate the potential downside in the Canadian dollar for the near future.