In the past few weeks, the exchange rate of the Canadian dollar against the US dollar has fallen significantly, reaching a low of 1.38994.
The following are the main reasons for the continued decline of the Canadian dollar:
Geopolitical turmoil: The recent conflicts in the Middle East have greatly suppressed global risk appetite. This has had a negative impact on currencies such as the Canadian dollar that are more reliant on a prosperous and stable global economy. When investors feel uneasy or uncertain, they often withdraw from the Canadian dollar and turn to the US dollar.
Chaos in the global bond market: the rise in the yield of US treasury bond bonds makes them more attractive to global investors. As these bonds are denominated in US dollars, increasing demand for them will drive demand for the US dollar. Therefore, the US dollar has strengthened against other currencies.
Economic gap between Canada and the United States: The economic connection between Canada and the United States usually means that the gross domestic product (GDP) growth rates of the two countries are very close. However, in the third quarter, the annual GDP growth rate in the United States was 4.9%, while the Canadian economy was close to contraction. This difference is rare in history, and there were only two significant differences before the COVID-19 pandemic.
Economic pressure in Canada: Due to rising borrowing costs, Canadian consumers are burdened with debt and are cutting back on expenses. The housing sector is sensitive to interest rate fluctuations and accounts for a significant portion of Canada's GDP, making it a prominent challenge for the Canadian economy. On the contrary, the US fiscal policy with a budget deficit of $1.7 trillion is injecting vitality into consumers and the US economy. This indicates that compared to Canada, interest rates in the United States may remain relatively high for a longer period of time.
Although many market analysts expect the Canadian dollar to rebound in mid-2024, Inchange Financial expects the Canadian dollar to face challenges in November and December.
Is the Canadian dollar expected to rebound by the end of the year?
The Canadian dollar rose against the US dollar last Friday (November 3) due to high risk sentiment as US labor market data supported bets that the Federal Reserve may have ended its monetary policy tightening cycle.
Although the selling of bonds seems to have lost momentum, Rabobank analysts said: "We cannot rule out the possibility that the yield of 10-year treasury bond bonds will rise further - so far, we believe that this is mainly the result of the rise of term premium. However, we expect that it will fall sharply to 4.45% by the end of the year."
If this situation becomes a reality, then the US dollar against the Canadian dollar is likely to fall below 1.36, and we now expect the year-end target to be above 1.3620
We do not expect the US dollar/Canadian dollar to further rise. However, it is unlikely to return to the 1.35 level this year
Analysts from Scotiabank in Canada also reiterated that there is uncertainty about whether bond yields will further decline, but they stated that the low yield environment supports risky assets such as stocks and the Canadian dollar.
Analysts from Scotiabank pointed out: "The volatility of the interest rate market is still unusual, so it may be doubtful that we can see how much the US bond yield will fall in the near future. However, it seems that the US dollar is more and more likely to rebound in the second half of the year and achieve further reversal."
The environment with low yields is likely to cause the stock market to rebound at the end of the year. A general decline in the US dollar and a rise in the stock market will be beneficial for the Canadian dollar
Looking ahead to next week, traders will pay attention to the October 25th policy decision summary released by the Bank of Canada on Wednesday.
There are not many other factors on the economic agenda of the United States or Canada that may have an impact on the Canadian dollar.
Technically, FXStreet analysts pointed out that "the US dollar/Canadian dollar will fall back to the 50 day moving average (SMA) near 1.3625, and the long-term decline will bottom out around 1.3500 near the 200 day moving average
In the upward direction, the US dollar needs to find enough momentum to break through the 1.3900 level against the Canadian dollar in order to once again break through the 12 month high of 1.3978 hit at the end of 2022
