FX Forecast September 2023 – Canadian dollar losing ground

• For information purposes only

• USDCAD Q3 23
• Median 1.34
• Mean 1.33
• High 1.40
• Low 1.27
• Forward 1.36
The Canadian dollar was gaining some ground against the US dollar in June and July but the trend gave up with
US dollar dominance is being underlined again. The 0.5% interest rate differential between the two countries and a higher likelihood of the US to raise rates even higher on the back of a stronger economy has pushed the US dollar higher against the Canadian dollar. In fact, all major world FX are lagging behind US dollar performance. The US was trading at 1.30 Canadian and now is closer to 1.37 Canadian dollars.
This week, the Bank of Canada held its main interest rate unchanged at 5.0%, after nonstop 10 hikes since March of 2022 for a total of 4.75%. They noted that recent economic reports have shifted into a weaker phase and labor-market pressures have eased. Signaling their concern over the emerging weakening economy.
Nevertheless, they still pointed out their caution regarding " the persistence of underlying inflationary pressures," and stood vigilant to raise rates again should underlying factors not improve.
The last inflation print for Canada edged up to 3.3% with more stickier constituents while the US is showing 3.2%. Along with the Federal Reserve, the Bank of Canada has been among the most aggressive developed economies' central banks in lifting rates higher to curb hot inflation.
The Canadian dollar is feeling the pressure against the greenback and was the lagger among the G10 currencies following the decision. US central bank earlier noted that they are still open to more rate hikes. Bank of Canada made the same comment this week, trying to convey a hawkish message but investors are looking past it, betting on the weaker economic stance of Canada and their unlikely determination to raise rates.
The forecast for both the US and Canada shows another 0.25% rate hike is expected by the yearend but the US is much more likely to deliver on the expectations than Canada. US economic data including unemployment have been strong while Canada's GDP shrunk -0.2% quarter over quarter unexpectedly quarter and job hiring showed signs of weakness. Meanwhile, the US doubled its GDP forecast for 2023 and expects GDP to grow by 5.6%.
The US dollar is undisputedly strong and pushing down other major FXs including the Japanese Yen and Chinese Yuan to the extent that Japanese authorities warned against strong Yen depreciation which is at the lowest level against the USD since 2007. China's central bank is also adopting a daily reference rate to support the currency. The dollar index has continuously increased in the past two months rising to 104 and the dominance seems to continue for the time being.
Strong US economic data, the US Federal Reserve's determination to keep the rate higher for longer, and weaker data coming from other parts of the world from Canada to China all support a stronger dollar for longer.