Since late December of last year, the Canadian dollar has been trading in a tight range between approximal 1.34 to 1.36 versus the US dollar. The USD/CAD currency pair has attempted numerous times to push past the 1.36 range, but it has failed to do so in a sustained manner. There are a couple of reasons why the USD/CAD pair has been trading in a tight range.
Interest Rate Convergence:
There has been much speculation about how the Canadian economy is more sensitive to interest rate pressures versus the US economy and there is no doubt about this. However, when it comes to the timing and the number of interest rate cuts, both the Federal Reserve Bank and the Bank of Canada are on a relatively similar path. Both are expected to begin cutting rates in the second half of 2024, and both banks are expected to cut about three times by 25 basis points each time. Given that a high interest rate environment is less advantages for the Canadian economy, investors are of the opinion that the Bank of Canada has a smaller margin of error and a narrower window to maneuver, and that is why economic news that shows a diverging path in interest rate policy weakens the Canadian dollar.
Booming Commodity Prices:
What is keeping the Canadian dollar from sinking is the recent rally in commodity prices. As we all know, Canada is a major exporter of commodities, namely oil and gold. With oil prices rallying and gold prices hitting multiple all-time highs, there has been steady demand for the Canadian dollar as investors look to take advantage of this boom in prices.
The Canadian dollar has been stuck between converging monetary policy with the Fed and elevated commodity prices. What investors are looking for is clear economic indicator that shows that BoC will have cut rates before the Fed or that the rally in commodity prices will eventually fade. If and when there is further clarity about one or both of these factors, then expect the Canadian dollar to break out of the current trading range in a significant manner.
The Canadian dollar is currently trading at 1.3522 CAD against the US Dollar.
