In this section taken from Courrier de l’Économie, our journalists answer questions from our readers. Click here to subscribe.
When traveling to the United States, how can we judge the situation to know when to buy US dollars? What are the elements that cause the exchange rate to fluctuate between the two countries? -Solange Gravel
“If you travel, you know that buying foreign currency can cost you more one day, and less expensive another,” the Bank of Canada immediately notes in an explanatory note. Obviously, our reader had made the same reading of the situation.
The exchange rate is a measure of the value of one currency relative to another. Canada has a “floating” currency, meaning the value of the Canadian dollar fluctuates depending on the quantity of dollars exchanged in the foreign exchange market. It is in this market that investors, for example banks and pension funds, will exchange currencies.
The demand for Canadian dollars in the market is linked to the demand for our goods and services. “The more people want to buy what we sell, the more our dollar becomes valuable,” summarizes the central bank.
Other factors also influence the value of the exchange rate: the relative strength of our economy, our interest rates and our inflation rate compared to that of other countries, among others. With so many variables that can go in one direction or the other, it is therefore hazardous to try to predict the exchange rate that will be in effect tomorrow.
And what about the exchange rate with the US dollar?
During the last week of April, you had to pay approximately 1.37 Canadian dollars to buy one American dollar, a rate comparable to that in force during the same period a year earlier. At the end of April 2022, the exchange rate hovered around CA$1.28/US$.
In a study published on April 26, Jimmy Jean, vice-president, chief economist and strategist at Desjardins, and Hendrix Vachon, senior economist at the bank, indicate that “ [l]The months of May and June are very likely to resemble April.
“The Canadian dollar is expected to lose further ground in the coming months,” add the experts. According to the institution, the exchange rate should approach CA$1.40/US$ in the coming months.
“We could nevertheless observe the beginning of a reappreciation taking place by the fall in anticipation of future rate cuts in the United States,” maintains Desjardins. In the longer term, the fund forecasts that it will cost CA$1.34 to buy US$1 in the last quarter of 2025.
Economists Stéfane Marion and Kyle Dahms, from the National Bank, see things the same way in an analysis published in April. “ [N] We still expect the US$/CA$ rate to rise above 1.40 in the second half of 2024.”
“The poor performance of the Canadian dollar compared to the US dollar is a notable curiosity in 2024,” notes the bank. “The difficulties of the Canadian economy compared to its southern neighbor and a potential divergence in monetary policy probably explain this phenomenon. » The National Bank has made forecasts until the first quarter of 2025 and predicts that the exchange rate will then be 1.40 CA$/US$.