What factors affect USD to CAD?
The exchange rate is watched closely by policy makers and businesses and analyzed by hundreds of analysts around the world. USD to CAD forecasts generally attempt to determine the future of the exchange rate based on the factors that are known to affect the USD to CAD exchange rates.
The level of current and future expected interest rates in Canada and the US are important to the exchange rate. Investors prefer to hold assets in the currency with the highest return. As such, all else equal, the currency offering the higher interest rate is preferred and the relative difference in interest rates is watched closely. Of course, interest rates are not static and investors take into account not just the current rates of interest but also expected future rates of interest, as reflected in the yield curves of the two countries. The determination is further complicated by the fact that investors adjust for inflation expectations when comparing interest rates. Nonetheless, the first principle is that investors prefer higher rates to lower rates when it comes to choosing currencies. For example, if the Bank of Canada makes an announcement that hints at raising rates, the Canadian dollar will generally move up.
The price of commodities, especially oil, matters a lot to the Canadian dollar. Since Canada is a huge net exporter of oil, an increase in the price of oil will drive up the demand for the Canadian dollar for those who want to buy our oil (most of which goes to the US). So, the exchange rate is often very sensitive to changes in the price of oil, with the value of the Canadian dollar going up as oil prices go up and vice versa. While other commodities matter to the Canadian dollar, none of them matter as much as the price of oil.
Perceptions of overall risk can impact the USD to CAD exchange rate. The US dollar is a global “risk-haven”. That means that when global economic sentiment deteriorates or the perceived risks to the global economy go up, investors tend to prefer the US dollar. As such, when risk averseness increases, the US dollar goes up and vice versa. Canada’s currency is known as a “risk currency”. It tends to do better when risk recedes, and global sentiment improves.
The USD to CAD exchange rate is sometimes correlated with movements in stock prices. This is because stocks tend to move up in risk-friendly environments that also move up the Canadian dollar’s value.
Geopolitical developments are an important consideration for the USD to CAD because they can impact the factors that affect exchange rate. For example, rising tensions with China may be perceived as contributing to an increase in risk and therefore driving up the US dollar. Alternatively, tensions in the Middle East that are seen as potentially disrupting the flow of oil sometimes drive up the price of oil and therefore the Canadian dollar.
