Over the last two years, the Bank of Canada and the U.S. Federal Reserve have taken drastic steps to cool inflation. While unprecedented interest rate hikes have taken a toll on the Canadian economy, the U.S. economy is booming. We can see this playing out with the divergence between the Canadian dollar and the U.S. dollar.
The Canadian economy is quickly getting to the Bank of Canada’s 2% inflation target while U.S. inflation is actually heating up, hitting 3.5% in March. That’s well above the Federal Reserve’s target of 2%.
Stubbornly high U.S. inflation means the U.S. Federal Reserve may not be cutting interest rates as quickly as investors first thought and could stay higher for longer. To get a handle on sticky inflation, the U.S. central bank could result in an unexpected hike in interest rates. The Bank of Canada, meanwhile, has hinted it will start cutting interest rates sooner rather than later.
Strong U.S. economic data and a weak Canadian economy have sent the Canadian dollar to its lowest level in five months. Since the start of April, the Canadian dollar has lost 1.3% of its value compared to the U.S. dollar and is down 3.2% since the start of the year to $0.7298 per U.S. dollar.
The Canadian dollar could fall even further. Thanks to the unstoppable U.S. economy, some economists see the Canadian dollar falling to as low as $0.72 per U.S. dollar in June.
Even if the Bank of Canada doesn’t announce an interest rate cut in June, the Canadian dollar could still take a hit since the Canadian central bank is expected to make earlier, deeper interest rate cuts in 2024 than the U.S. central bank.
How Does a Weaker Canadian Dollar Impact Stocks?
What does a weak Canadian dollar mean for investors? On one hand, a weak Canadian dollar can be a boon for companies that operate in the tourism industry, where a weaker dollar can attract visitors, especially the U.S. since their money goes further here.
For Canadian companies that get a lot of their revenue from exports, such as the energy, forestry, and manufacturing industries, it can mean bigger profits. If they make $100 from a U.S. client, that gets converted into $136.80 Canadian.
At the same time, a lower Canadian dollar makes imports more expensive, which results in higher retail prices. Higher import costs and financing also hurts businesses.
With the Canadian dollar falling against the U.S. dollar, investors are looking for so-called safe havens to invest their money. This can result in pulling money out of the stock market and buying bonds, such as U.S. treasuries.
Investors are even purchasing U.S. dollars. Why? Similar to stocks, investors are looking for strong assets, and when you sell one currency, like the Canadian dollar and buy the U.S. dollar, the former loses value while the latter gains in value.
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The Canadian dollar has tumbled to its lowest level in five months with traders taking their most bearish stance on the Canadian dollar in a year on expected interest rate cuts. Which industries and sectors will benefit from economic headwinds and the erosion of the Canadian dollar against the U.S. greenback? Ask the trading professionals at Learn-To-Trade.com.
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