The Latest Fluctuations In The CAD/USD Currency Pair

This article was last updated on April 16, 2022

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Fluctuations in the forex industry are normal and play a big role in enhancing market liquidity. For traders of the USD/CAD or the 'loonie' as it is colloquially called, keeping abreast of price fluctuations is important. Here is a look at the latest fluctuations and factors responsible for this price action:

An Overview of the CAD/USD Price Fluctuations

In general, the CAD/USD currency pair fluctuations have been in favor of the USD since February 14, 2013. That was the last time in recent years when the CAD's value traded at or above parity relative to the USD value. According to a statement from the Bank of Montreal, it expects the CAD to continue its fall against the USD to about 75 cents in the near future. As of July 24, 2015, the Canadian dollar was trading at 76.69 cents to the USD. According to figures published on the business section of cbc.ca, this is the lowest level it has traded against the USD in slightly more than a decade. In fact, a closer look at the CAD/USD performance shows a Canadian dollar frequently flirting with new lows since the start of 2015.

Factors Causing CAD/USD Price Fluctuations

There are several factors responsible for recent CAD/USD price fluctuations. These include Bank of Canada interest rate cuts, Canada's economic outlook and the current account deficit.

1. Bank of Canada rate cuts

Financial and forex industry analysts know that the monetary policies adopted by a country's central bank determine the fortune of its currency against others. The same is true in Canada where the Bank of Canada's recent interest rate cut has weighed heavily on the CAD/USD exchange rate. On July 14, 2015, the Bank of Canada Governor Stephen Poloz announced a rate cut of one quarter of a percentage point. In turn, spooked investors and other market players pushed the CAD/USD rate to new lows. This is contrary to the US Federal Bank's Chair Janet Yellen who has signaled that a rate hike is on the cards in the near future. Bank of Montreal chief economist Douglas Porter reckons that the current rate of 0.75% should not be a source of concern given it is a fraction of the 21% all time high registered in the summer of 1981.

2. State of the economy

Another factor that has had a noticeable impact on recent CAD/USD fluctuations is the state of the Canadian economy. The Bank of Canada has cut its forecast of the Canadian economy's growth prospects. This is due to falling commodities oil prices globally and lower-than-forecast non-energy commodity exports. In fact, a statement released by the BOC while announcing its interest rate cut noted that it expects real GDP to have contracted in the first half of 2015. This caused higher excess capacity as well as adding downward inflationary pressure on the economy. The problem with rising inflationary pressure is it increases bearish sentiment surrounding the CAD leading to lower exchange rate relative to the USD.

3. Current account deficit

A current account deficit in favor of the US applies more downward pressure on the CAD because businesses that import good from the US must buy USD by selling CAD. This increases supply of Canadian currency in the market hence lowering its exchange rate outlook. Figures published by the Wall Street Journal (WSJ) show that Canada's current account deficit in favor of the US stands at a seasonally adjusted 17.47 billion Canadian dollars.

Conclusion

The CAD/USD currency pair's recent fluctuations are driven by three major factors, according to Bank of Montreal chief economist, Douglas Porter: Bank of Canada monetary policies, weak Canadian economy compared to the US's, and falling oil prices that have caused current account deficit to hit new highs since 2010.