Predictions for the Canadian Dollar vs the US Dollar in 2024

Factors that could influence the USD/CAD pair in 2024

Going into 2024, Central bank policies, economic forces, and macroeconomic factors like inflation, capital markets, trade deficits and surplus or international political decisions will all play a part in the value of the USD/CAD pair.

The biggest indicator could be the policies of the Bank of Canada and the Federal Reserve and the disparity between their respective policy lending rates. Ideally, when the Bank of Canada adopts a more hawkish stance by raising interest rates to control inflation, it may strengthen the CAD against the USD while attracting foreign investors seeking higher investment returns. This increased demand for the Canadian Dollar can lead to an appreciation of the CAD against the USD.

Recap of the USD and CAD in 2023

The USD/CAD pair remains highly liquid and was one of the most actively traded in the forex market.

Rate hikes from the Bank of Canada and the Federal Reserve dominated news cycles for parts of 2023 as both Central Banks battled to rein in inflation. These rate hikes and the resulting difference in the benchmark lending rates closely tie into the USD and CAD values.

In 2023, the BoC witnessed three interest rate hikes, closing the year at 5.0%, while their American counterparts had four hikes to close out the year at 5.5%.

Apart from Rate hikes, the Loonie has been historically tied to Oil prices- Canada being among the largest oil exporters in the world. Changes in oil prices impact the state of the Canadian economy and, consequently, the value of its currency. Due to its close association with oil, the Canadian dollar is often referred to as a commodity currency.

However, in a break with tradition, the CAD rose against the USD despite crude oil weakness during the second half of 2023.

The CAD opened the year with bids close to 1.3550 against the USD, peaking at around 1.3900 before a weakening USD in the fourth quarter saw drops below the 1.3300 handle.

Inflation levels and lending rates in Canada and the US

Canada ended 2023 with its inflation at 3.1%, down from the 3.8% recorded in October.

The US has been on a similar trend, with the Federal Reserve's 11 rate hikes over 2022-2023 helping to lower the inflation rate to 3.12% at year's end.

Current Lending rates

The Bank of Canada has maintained its benchmark lending rate at 5% for the third time in December, with the last rate hike happening in July.

Across the border, the Federal Reserve has maintained its rate at 5.25- 5.5%.

Could signs of recession tank the CAD in 2024

The interest rate differential between the Federal Reserve and the Bank of Canada plays a key role in determining the value of the USD/CAD pair. A higher interest rate in the US tends to strengthen the US dollar, causing the USD/CAD pair to increase as it takes more Canadian dollars to purchase the stronger US dollar. While the rates were relatively in-sync for most of 2023, 2024 could be a year of more disparity as both Banks oversee increasingly diverging economies and interests.

These diverging responsibilities can be seen through the lens of each country's unemployment rates. The US currently has its unemployment rate at 3.6%, while Canada's was close to 6% in November 2023, which could pressure the BoC into adopting easing measures earlier.

Market trends in early 2024 also point to Canada heading toward an early recession, and could result in the BoC cutting policy rates well before the Federal Reserve.

Predictions for USD/CAD pair in 2024

Economic wisdom points to restrictive rates being indulged for longer than necessary, bringing about a slowdown in economic activity with a rise in unemployment- eerily similar to Canada's current predicament. This has fostered a common sentiment for rate cuts to begin early in 2024.

According to a Reuters forecast, based on the opinion poll of 35 foreign exchange analysts, the CAD is projected to strengthen 0.4% to 1.3533 per USD, compared to the bullish expectations of 1.3450 per USD in a similar November poll.

Simon Harvey, head of Monex Europe and Monex Canada, alluded to signs of a looming recession factored into the predictions.

"Our view is the Canadian dollar is going to face a difficult next three months as the data starts to look like the Canadian economy is teetering on the edge of recession if not in a mild recession."

He also mentioned that the BoC was likely to ease its policy rates earlier than the Federal Reserve in his speech, saying:

Soft domestic data "should bring forward expectations of BoC easing, especially relative to the Federal Reserve, earlier Bank of Canada easing is going to widen rate differentials in favour of USD-CAD."

The USD/CAD currency pair and the current exchange rate

As of January 3rd, 2023, 1 USD= 1.334947 CAD