Outlook for Canadian Dollar

By Fergal Smith

Summary

The Canadian dollar is expected to rally against the U.S. dollar as lower borrowing costs boost the economy. However, the upcoming U.S. presidential election could impact this outlook.

Expectations

A Reuters poll conducted from Oct. 28 to Nov. 1 among 40 foreign exchange analysts predicts:
– The Canadian dollar, or loonie, will strengthen by 2.4% to 1.36 CAD per USD by the end of January.
– In one year, the currency is expected to advance 5.5% to 1.32 CAD per USD.

Kyle Chapman, FX markets analyst at Ballinger Group, attributes this forecast to the belief that the Federal Reserve will catch up in its rate cutting, while Canada’s economy recovers from its own rate cuts.

Economic Factors

• Bank of Canada Governor Tiff Macklem mentioned that economic impacts from easing measures are beginning to manifest.
• The central bank has reduced its benchmark interest rate by 1.25 percentage points since June, now at 3.75%.
• With household debt in Canada at 184% of net disposable income in 2023, the economy is sensitive to interest rate changes.

Recent Trends

In October, the Canadian dollar saw a 3% drop, marking its largest monthly decline since September 2022, hitting a near three-month low at 1.3945 CAD per USD.

Political Influence

The outcome of the U.S. presidential election poses a significant risk for the Canadian dollar. Republican Donald Trump has suggested extensive tariffs on imports, which could affect Canada, as it exports around 75% of its goods to the U.S.

Chapman noted that a Trump presidency could undermine the expected economic recovery.