The Canadian economy is closely linked to its neighbor to the South, and the Bank of Canada has kept interest rates nearly equal to those in the US. This has resulted in a recent period of low volatility in the USDCAD pair.
Canada’s currency has recently experienced an extended period of low volatility against the US dollar. The Canadian dollar spent the last 19 months trading within the bounds of 1.31 and 1.40, the narrowest range for that period of time over the last 30 years. Canada reacted with the Fed in raising interest rates starting in March 2022, maintaining a tight spread between rates in the two countries. That action muted the effects of the global dollar rally on the Canadian currency. The Canadian economy has to a large extent mirrored that of the US, with the result that USDCAD has settled into a state of near-equilibrium.
The Bank of Canada last raised rates in July 2023 to the current level of 5%. Inflation has been trending lower since hitting a high of 6.2% in June 2022. The latest reading (Jan 2024) shows core inflation at 2.4%, the lowest since April 2021. BoC is expected to lower rates this year if inflation continues to drop. Most analysts believe that the BOC’s cuts will largely be aligned with the actions of the US central bank.
Canadian GDP growth is expected to be 1.3% in 2024, according to the OECD.
The IMF similarly forecasts growth of 1.4% for the year. Unemployment rose to 5.8% in February 2024, and is expected to move slightly higher in coming months. Home prices have been falling since August 2023 as higher interest rates have dampened demand.
The Canadian Dollar in 2024
The Canadian dollar has been edging lower against the US dollar since the beginning of 2024, losing just over 2% year-to-date. It currently (1.35) remains in the middle of the 19 month trading range of 1.31 to 1.40. BoC is expected to keep rates steady until July. After the most recent policy meeting, BoC governor Tiff Macklem said, "It's still too early to consider lowering the policy interest rate," warning that "future progress on inflation is expected to be gradual and uneven" and "upside risks" remain.
ING FX Strategist Francesco Pesole echoed most analysts in stating, "The persistence of CAD’s correlation to US data and the strict link between Fed and BoC policy expectations means the room for a major break in either direction in USD/CAD does not seem very likely.”
Canada is a major exporter of crude oil, so major movement in crude prices could have an impact on its currency. Analysts will also be closely monitoring home prices and unemployment rates for cues to the timing of any rate cuts.
Technical Considerations
Any breakout of the 1.31-1.40 range would likely push the pair to longer-term support or resistance levels.
A drop below 1.31 in USDCAD would likely set the stage for a retest of the 2022 low of 1.24. A move below 1.24 would likely result in a drop to 1.20 and a possible test of long-term support at 1.14.
If USDCAD pushes above the 2022 high at 1.40 it is likely to challenge the double top (2016-2020) at 1.47.
Hedging Considerations
Canada’s time zones are aligned with those in the US, so USDCAD is most liquid during the North American trading session. Trades should ideally be executed during those hours.
Canada has maintained a 50 basis point discount to US rates. Though narrow, the spread favors hedging Canadian dollar depreciation, as hedgers going long USDCAD will get the benefit of the differential.
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