Trading The Canadian Dollar: What To Know
The dollar symbol ($) is one of the most famous in the world. The Canadian dollar and the Australian dollar are the most popular dollars after their US counterpart. The Canadian dollar pairs with the US dollar, the euro and the British pound are often added to traders’ portfolios as a way to diversify their strategies.
It should be noted that Canada is the fourth largest oil producing and exporting country in the world. Canada also has vast resources of natural gas, minerals, timber etc., so some economists note that the Canadian currency tends to be correlated with commodity prices.
In our blog, you will have the opportunity to get to know the Canadian dollar by reading some interesting information about it as well as some forecasts shared by important institutions.
Table of Contents
The Canadian dollar and the Bank of Canada
The Canadian dollar (or dollar canadien in French) is the official currency of Canada. The Canadian dollar symbol is $, its code is CAD while some traders tend to call it "Loonie", a nickname given by the image of a common loon on the one-dollar coin. In 1867, the Province of Canada, New Brunswick, and Nova Scotia united into a federation named Canada. As a result, their respective currencies were merged into a singular Canadian dollar. The Canadian dollar is the seventh most traded currency in the world, according to a survey by the Bank for International Settlements (BIS).
The Bank of Canada (BoC) was established in 1934. The BoC’s governing board mission is to conduct monetary policy and promote a safe and efficient financial system. The BoC’s council convenes eight times per year to decide on interest rates and matters related to monetary policy implementation.
Bank of Canada Hikes Interest Rates
On July 12th, the BoC announced its decision to hike interest rates by 25 basis points. It was the tenth rate hike since March 2022, taking rates to the highest level recorded in the last 22 years. The BoC’s move was in line with economists’ expectations as raising borrowing costs is a way to control an overheated economy that faces high inflation figures and a strong labour market.
The BoC’s Governor Tiff Macklem said in a post-meeting press conference that the bank expects inflation to ease but that it could take until the middle of 2025 to hit its 2% target. The BoC’s head also mentioned that it would be too early to talk about any interest rate cuts, taking into consideration current economic conditions.
Canadian Dollar Performance
There have been significant fluctuations in the Canadian dollar’s value exchange rate against the US dollar in the last three years. The Canadian currency hit a 4-year low at the beginning of March 2020, trading at $1.40.
Date Range: April 17th 2018 – 12th July 2023. Date Captured: July 12th 2023. Past Performance is not an indicator of future results.
The Loonie recovered, hitting a 6-year high in May 2021, trading at $1.20 against the US dollar but ever since then, it has been losing ground.
Date Range: April 17th 2023 – 12th July 2023. Date Captured: July 12th 2023. Past Performance is not an indicator of future results.
The Canadian Dollar was a mid-performer amongst the G10 majors in the first half of the year. The rate hike on July 12th and expectations regarding a tighter monetary policy helped the Canadian dollar’s value grow against its US counterpart.
Trading the Canadian Dollar: What Do Analysts Forecast
Economists at TD Securities suggested that the Canadian dollar could benefit from a potential fall of the US dollar in the second half of the year. “For CAD, it is likely to catch the tailwinds of the broader USD weakness, which will probably invite a move to 1.30 in the near future. That said, keep in mind that BoC will maintain adherence to data dependency like other central banks. In turn, they are unlikely to commit to another hike, leaving the door open for this to be the last. With that in mind, we also think that CAD can lose some of its appeal on the crosses, given our outlook of slowing US growth in H2. The deeper USD downturn we expect in H2 will certainly benefit CAD, but it won’t be the best way to play a deeper downturn in the USD,” they note.
Macquarie Futures USA analysts don’t seem to be very optimistic about the growth of the Canadian economy in the second half of the year. “Our bearish view for the second half 2023 remains predicated on the prospect that Canada will suffer a more severe slowdown than the U.S. The rise in rates has already happened and households will begin to feel the squeeze as fixed-rate mortgages are rolled over at higher rates. Until now, this effect has been delayed as banks try to extend durations on new mortgages to lighten the payment burden for households that are overly indebted. But this has its limits,” they wrote in their report.
ING currency experts stress that the Canadian dollar could be affected by a potential negative revision of the US economic growth forecast. In the Dutch bank’s report, they wrote that “our pre-BoC forecast for USD/CAD had 1.30 as an end-3Q target. We now think the chances of 1.30 being hit earlier this summer are quite elevated. Later in the year, a negative re-rating in US growth expectations and prospective Fed cuts late in 2023 can impact CAD negatively, and we expect it to lag other procyclicals later in the year. But fresh BoC tightening means that USD/CAD may trade closer to 1.25 than 1.30 by year-end.”
Commodity Prices Drop To Impact The Loonie?
Market analysts at NBC’s markets division noted that a potential global economic slowdown could weigh on commodity prices, weakening Canada’s exports and thus setting the Canadian dollar on a weaker path.
In their report, they said: “The Canadian Dollar was the fifth best performing major currency against the USD in the first half of 2023. One of the main drivers of CAD appreciation in the first half of the year was the significant tightening of Canada-US interest rate differentials. In the absence of a boost from interest rates, the outlook for the Canadian Dollar will increasingly depend on commodity prices. This could translate into a weaker loonie over the coming months.”
Trading The Canadian Dollar And Risk Management
Some traders prefer to add the Canadian dollar pairs to the US dollar (CAD to USD), to the euro (CAD to EUR) and to the British pound (CAD to GBP) to their portfolio. The Canadian dollar is among the most popular currencies in the global market due to the size of the Canadian economy as well as its strength since Canada is a member of the G7. The question that comes up is if beginner traders should incorporate the Canadian currency in their arsenal.
Trading the Canadian dollar, as with all currency pairs, requires practice and building a strategy that includes the usage of risk management tools. Beginner traders should study the market carefully and design a strategy that would be in line with their financial goals.
Minimising risks requires beginner traders to learn how to use the right tools provided by brokers. A broad range of educational materials available online such as blogs, seminars, webinars can help you strengthen your trading knowledge and avoid potential pitfalls. Learn how to use risk management tools to reduce trading risks that could jeopardise your financial plans and enjoy a smoother experience.
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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.
