2024-11-05 21:37:00
The value of the Canadian dollar is at risk of slipping below the threshold of 70 US cents shortly, anticipate economists at the National Bank.
Published yesterday at 4:37 p.m.
“The Canadian dollar is struggling this fall” due to the deterioration of “fundamental characteristics” and “lackluster prospects” of the Canadian economy, reads a new analysis of the currency market led by Stéfane Marion, economist and chief financial markets strategist at National Bank.
The authors of the analysis also highlight the significant gap between the reference interest rate in Canada, lowered to 3.75%, and the target rate in the United States, which is still around 4.8%.
This difference of just over one percentage point results from the acceleration of rate cuts by the Bank of Canada compared to the more reserved position of the American Federal Reserve (FED).
“This significant divergence in monetary policies is now reflected in the widest spreads between Canadian and U.S. Treasury bond rates since the 1997-1998 Asian financial crisis, which is an important determinant of the exchange rate” between dollars Canadian and American, indicate the economists of the National Bank.
Meanwhile, “the US dollar remains strong, supported by a resilient US economy and relatively high interest rates compared to other developed economies. Therefore, we are increasing our exchange rate target [entre les dollars américain et canadien] from 1.41 to 1.45 Canadian dollars.
Converted into figures better known to the public, this exchange rate from the international currency market corresponds to a drop in the value of the Canadian dollar from its current level of 72 US cents to an anticipated level of 69 US cents during the first quarter of the year 2025.
If it proves true, such a drop in the value of the Canadian dollar compared to its powerful American neighbor would be the most accentuated since its last two passages around 68 American cents, which date back to the years 2020 and 2016.
Moreover, in a recent analysis of the currency market, Montreal analysts from the firm Scotia Capital, a subsidiary of Scotiabank, warned their investor clients of a risk of prolonged weakness in the Canadian dollar.
“We have been pessimistic on the Canadian dollar for some time, and we continue to see more downside than upside risks in the short to medium term,” reads the analysis overseen by Hugo Ste-Marie, director of portfolio strategy and quantitative analysis at Scotia Capital.
“A weaker dollar would not necessarily be beneficial for the Canadian economy. In the short term, a weaker currency would benefit Canadian exporters. But in the long term, it would not help Canadian companies invest more in imported machinery, equipment and technology that Canada sorely needs to solve its low productivity problems. »
Furthermore, this new episode of depreciation of the Canadian dollar to the threshold of 70 US cents promises to be costly for Canadians planning stays in southern destinations, where the US dollar is often the currency of payment for purchases of goods and services. .
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**Interview with Stéfane Marion, Chief Financial Markets Strategist at National Bank**
**Interviewer:** Thank you for joining us, Stéfane. Recent analyses predict that the Canadian dollar may slip below 70 US cents soon. What are the primary factors contributing to this potential decline?
**Stéfane Marion:** Thank you for having me. The Canadian dollar is indeed facing significant challenges this fall. The main factor is a deterioration in the fundamental characteristics of the Canadian economy. The outlook appears lackluster, which diminishes investor confidence.
**Interviewer:** You highlighted the monetary policy divergence between Canada and the U.S. Can you elaborate on that?
**Stéfane Marion:** Certainly. The Bank of Canada has lowered its reference interest rate to 3.75%, whereas the Federal Reserve in the U.S. maintains a target rate around 4.8%. This shift has resulted in the largest spread between Canadian and U.S. Treasury bond rates since the Asian financial crisis of 1997-1998, which significantly impacts the exchange rate between the two currencies.
**Interviewer:** What does this interest rate gap mean for investors and the average Canadian?
**Stéfane Marion:** For investors, the higher interest rates in the U.S. make American assets more attractive, leading to capital outflows from Canada. For the average Canadian, a weaker dollar means more expensive imports and potential inflationary pressures, which can affect everything from groceries to consumer goods.
**Interviewer:** Given the current economic environment, what are your updated forecasts for the exchange rate between the Canadian and U.S. dollar?
**Stéfane Marion:** Based on our analysis, we’re raising our exchange rate target from 1.41 to 1.45 Canadian dollars per U.S. dollar. This translates to an expected drop in the value of the Canadian dollar to approximately 69 U.S. cents early next year, marking a significant shift.
**Interviewer:** If this forecast holds true, how would this impact the broader Canadian economy?
**Stéfane Marion:** If the Canadian dollar continues to weaken, it could lead to increased costs for imports and dampen consumer spending. However, it might also benefit exporters as their goods become cheaper for foreign buyers, potentially stimulating some economic sectors.
**Interviewer:** Thank you, Stéfane, for your insights on these important economic dynamics.
**Stéfane Marion:** My pleasure. Thank you for having me.
