What’s next for the Canadian Dollar?

The Canadian currency (CAD) strengthened last week. The intel was according to the bank. CAD ended the week modestly below C$1.28. This was the best weekly closing in almost seven weeks. Oil prices recovered. However, the actual story was a weaker US dollar. The big dollar had largely declined over the previous two weeks. This strengthens the Canadian dollar. The CAD was negatively impacted by Monday’s risk-off mood, and early Tuesday, it fell back toward C$1.29.

According to BMO, Canada’s bonds recovered last week throughout the curve, headed by the 5s and 10s. The surge occurred despite a better-than-expected gross domestic product (GDP) report on Friday and a 75bps rate hike by the US Federal Reserve. The market reacted positively to Governor Jerome Powell’s apparent moderate retreat from the Fed’s extreme hawkishness, which caused rates to fall despite the significant rate hike.

While 2s were 10 bps richer and longs lagged with a 4 bp advance, Canada’s 5s and 10s soared by nearly 20 bps. According to the bank, the five-year sector has been the greatest performer in recent weeks, rising by around 100 basis points since peaking on June 14. Across the curve, Canada’s underperformed US Treasuries, driven by a 12 bps movement in the 10-year note. For the first time since May, Canada 10s were traded through UST 10s.

Canadian Dollar and Economy

The value of a nation’s currency is established by a number of largely arbitrary factors. They are based on a combination of actual events and rumors. This is similar to how the value of shares in a corporation works. The US dollar, which is the world’s benchmark currency and is widely recognized as such, is used to value practically all currencies. Which is the one distinction between valuing currencies and free-flowing equities. The globe had previously used gold and silver weights, which still appear more egalitarian before the US dollar became the de facto standard, but that is unlikely to happen anytime soon for a variety of reasons.

Like the rest of the globe, Canada also values its currency in relation to the US dollar. Of course, you can compare the value of the Canadian dollar to the Euro or the Mexican peso, but ultimately, it all boils down to how those currencies are compared to the US dollar.

Will the Canadian Dollar ever again be equal to the US Dollar? The response is probably yes. When the US was mired in a deep recession with a severely compromised banking system. Canada, in contrast, was riding the $100 per barrel Oil bonanza, Canada was fiscally very sound with balanced budgets. It was actually paying down its accumulated debt, the CAD last matched and briefly exceeded the USD around 2007-2010. As a result, the Canadian dollar was valued up to 10% more than the US dollar by the world currency markets, which perceived it as being stronger than the US dollar.

The value of Canadian GDP has an impact on CAD strength. Oil was quite expensive in the last ten years. The Canadian dollar grew to be stronger than the US dollar. Investors predicted that this would last for years.