Demystifying the economy | Why is the Canadian dollar losing value?

Every Saturday, one of our journalists answers, in the company of experts, one of your questions on the economy, finances, markets, etc.

First of all, it should be remembered that variations in the value of the Canadian dollar in relation to the American dollar stem from transactions and quotes on the main currency markets.

Thus, the value attributed to the Canadian dollar depends a great deal on its supply and demand in relation to other major currencies in financial markets and international trade. Especially against its powerful and attractive neighbour: the US dollar.

“In 2022, the U.S. dollar ruled the currency markets, benefiting from its safe haven status and the widening interest rate differential between the U.S. Federal Reserve and other central banks,” Hugo said. Ste-Marie, director of portfolio strategy and quantitative analysis at Scotiabank World Markets in Montreal.

“The US dollar has also reached parity with the euro for the first time in two decades, as well as its highest level against the British pound sterling in almost 40 years. The greenback has also soared against the currencies of emerging economies”, underlines Mr. Ste-Marie in his recent statement of “Outlook 2023” for the financial markets.

“Inflation and the evolution of interest rates remain central themes on the financial markets, including the currency markets”, note for their part the economists of Desjardins in their most recent report “Projections of interest rates “.

“This contrasted with other major central banks signaling further interest rate hikes for 2023. Also, lower oil prices did not help the Canadian dollar. »

That said, what is the outlook for the value of the Canadian dollar in the currency market over the next few months? Could the very recent bullish surge last?

“Canada was the leader in job creation in December with more than 100,000 jobs added, and the unemployment rate fell. Wage increases have also shown a little less vigor, but that may not be enough to convince the Bank of Canada to take a break from raising interest rates as of the end of January,” observe economists Jimmy Jean and Hendrix Vachon at Desjardins, in their specific analysis post on “Currencies” published this week.

This jump in the value of the Canadian dollar promises to be short-lived given the power of attraction of the American dollar in a situation of economic malaise.

“Although the inflation news is good, the momentum of optimism in the markets [financiers] could soon be curbed by the deterioration of economic data, while the worst effects of interest rate hikes on the economy are yet to come,” the Desjardins economists anticipate.

“In this context, the US dollar could rebound against several currencies in the coming months. For the Canadian dollar, we expect a bottom around 72 US cents before it recovers later in 2023 and 2024.”