In this section from Courrier de l’économie, our journalists answer questions from our readers. To subscribe, click here.
“Do you think that the value of the euro will fall in the coming weeks against our currency?” – Kateri de Bellefeuille
Between the summer of 2020 and the summer of 2022, the value of the euro plummeted against the Canadian dollar, going from nearly $1.60/EUR to $1.30/EUR. A “windfall” that can be explained by the energy crisis that was raging in Europe at the start of Russia’s invasion of Ukraine. Since the beginning of 2023, the loonie has lost altitude and it costs roughly between $1.40 and $1.50 to get your hands on a euro.
The demand for a currency determines its value. If the demand for our goods and services is high, so will the demand for our currency. For example, the strength of an economy and political stability influence the value we place on a currency.
But the exchange rate is also closely linked to monetary policy. If a central bank raises its policy rate, the interest rates offered by financial institutions will also increase. This will attract foreign investment, thereby increasing the demand for the currency and, therefore, its market value.
The reverse is also true: a fall in interest rates will make investments in the currency in question less attractive. Demand for the currency will decrease, leading to a devaluation of the currency relative to others, ceteris paribus.
Right now, the Bank of Canada is in the midst of easing its monetary policy. After keeping its key rate high to combat inflation, the institution has made two consecutive 0.25-point rate cuts this year. Economists anticipate another cut in September.
If the Bank of Canada were the only one to lower its key rate, we would therefore expect to see the Canadian currency lose value. However, several central banks are doing the same, including the European Central Bank (ECB). Predicting the net effect of these changes is therefore a high-wire act, which we will leave to the experts to decide.
“After being one of the first major central banks to begin withdrawing its restrictive policy, the ECB stayed away in July to give itself time to get a clearer view of the data,” explain National Bank economists Stéfane Marion and Kyle Dahms, in a note published earlier this month.
“Since the last decision, July inflation figures have been slightly above their comfort level. However, the slowdown in growth [en particulier en Allemagne] suggests that the ECB is likely to continue to ease policy this year. That is why we continue to see some weakness in the euro.”
Forecasts
The National Bank predicts that the exchange rate will move from $1.51/EUR on 3e quarter of 2024 to $1.48/EUR in the 2nd quarter of 2025. At TD Bank, the exchange rate is expected to go from $1.49/EUR to $1.46/EUR over the same period. In short, no significant change in the coming months.
When setting her travel budget, our reader, who plans to visit Europe in September, must also take into account the price of accommodation, food, entertainment and transportation. Each of these sectors has its own business dynamics and could display higher or lower prices depending on the state of the tourism sector in the fall, in the regions she plans to visit.
The exchange rate, meanwhile, has the power to give him more — or less — bang for his buck in all of these categories. We wish him a safe trip and, perhaps, a little help from Christine Lagarde, the ECB president, and her Canadian counterpart, Tiff Macklem, who will be making decisions on the key rate in September.