CAD to USD: This Could Be Bad for the Canadian Dollar, Analyst

CAD to USDMore Downside for CAD to USD Exchange Rate

The Canadian Imperial Bank of Commerce (CIBC) has warned that the Canadian dollar will come under increasing pressure this summer. The CAD to USD exchange rate, meanwhile, is slipping further, as the U.S. Federal Reserve has started to warn investors that it sees the conditions for another rate hike. (Source: “Monthly FX Outlook,” CIBC, May 27, 2016.)

The rise in oil prices had given hope for a sustained recovery of the CAD to USD pair. However, rising crude exports from Iraq and a potential resumption of Canadian production after the Alberta wildfire disruption have all but eliminated that possibility. Suncor Energy, one of Canada’s top oil producers, wants to raise output in Alberta after an almost month-long shutdown due to wildfires. (Source: “Oil prices dip as Iraq raises exports, Canadian output set to restart,” The Globe and Mail, May 30, 2016.)

Apart from oil, the prices of which have a strong effect on the CAD to USD exchange rate, the United States Federal Reserve predicts that growth in the U.S. will continue at higher rates than in the rest of the world’s largest economies. Growth should continue just below three percent, while inflation and average wages will also be increasing. This will see the U.S. dollar rise against most currencies as the Canadian dollar continues to drop. (Source: CIBC, op cit.)

Of the factors affecting the CAD to USD exchange rate, the oil price stagnation will soon give way to faster rising inflation in the U.S. Janet Yellen has made it clear that a rise in interest rates in the United States is coming. That’s because the U.S. is seeing growth. The Canadian economy, in comparison, continues to stagnate and any rises are temporary, given the country’s excessive reliance on the ever more fickle resource and commodity markets.

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Whether the Fed and its chair, Janet Yellen, like it or not, the fact remains that if the economy and the labor market continue to improve, the Fed will have to necessarily intervene by raising the cost of money—in other words, raising interest rates. Yellen was especially adamant that the labor market has improved, which is code for higher interest rates ahead. (Source: “Yellen: Rate hike probably appropriate in the coming months,” CNBC, May 27, 2016.)

That, combined with the weaknesses of the Canadian economy, is likely to drive the Canadian dollar to record-low levels against its U.S. equivalent.