2018 wasn’t a good year for the Canadian dollar as it fluctuated and ended at two steps up and one step down! One of the major reasons was the unpredictable trade talks between America and Canada, along with plummeting oil prices. But the Canadian Dollar is expected to make an exceptional comeback in 2019.
US is still doing well
The economic growth of the US is still strong thanks to the corporate and personal income tax cuts that were implemented in 2018. They are the sole reason why investments have profited and consumer spending has gone up as well. Spillover effects may be expected in Canada as Americans buy more and visit more. Expansion is expected to continue next year at a rate of 2.5%. The steady interest rate has worked in favor of an appreciation of the U.S. dollar (USD) against most currencies.
How does US to CAD affect business and lifestyle?
Needless to say the exchange rate has enormous impact when it comes to business, tourism, and lifestyle. If the USD is stronger, there is some migration of manufacturing and labor outsourcing to Canada in an effort to lower costs. More goods are also imported from Canada into the US, while Americans are likely to buy property or go holidaying in Canada. If the reverse is true – the CAD is stronger – firms are more likely to import more from the US into Canada, while the citizens of the latter will most probably buy real estate and go vacationing in the US.
How has the CAD been affected over the years?
The Canadian dollar also called CAD is traded by long-term investors and intraday speculators in substantial volumes on a daily basis. The currency can be outright on the CME Globex futures market, as well as on the Forex market via currency pairings. The USD/CAD pairing is one of the most heavily traded.
As per the International Monetary Fund, the CAD ranks fifth among the most commonly held currency on a global scale, with a cumulative market share valued near US$119 billion. The CAD represents a significant valuation of the overall world currency markets, and generally doesn’t undergo frequent extremes in terms of pricing volatility as it happens with smaller currencies.
The CAD is basically a floating currency whose value is derived from the open market. The government has no role in dictating how much the CAD is worth at a specific time, nor is its value pegged to another currency – the CAD’s pricing rests in the hands of participants involved in the global currency markets. That is why the value of this currency is constantly evolving and could fluctuate between 5% and 10% in one trading session.
If you look at the US to CAD exchange rate over the last 10 years, from 2008 to 2018, you will notice the FX rate is always between 0.94 and 1.46 over that time period. The two currencies have been relatively close to each other in value over the past decade. Interestingly during this time period, they have flipped back and forth between which has been the stronger currency. In the time period of 2011-2012 the Canadian dollar was actually worth more than its USD counterpart when the exchange rate briefly went below 1.00. However, the USD surged once again with renewed strength and increased in value relative to the CAD.
The current decision by the Bank of Canada to keep its benchmark interest rate unchanged in April 2019 has affected the CAD as it fell by 0.5%. The Bank of Canada (BoC) is forecasting a 1.2% GDP gain in 2019, a downgrade from the previous 1.7% estimate. Drop in oil prices ensured no support to the CAD as 5.5 million barrel buildup in US crude inventories hit WTI prices to the downside. It is without a doubt that the dovish Bank of Canada policy stance and bullish USD/CAD technicals have undermined the currency.