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Following a broad-based downward trend since April, the Canadian dollar (CAD) has lost 5.76% of its value against the U.S. dollar (USD) so far this year.
This reflects a volatile outlook for the petrodollar. Nicknamed the “The loonie,” the beleaguered currency spiked to print its yearly low of 1.388 against the U.S. dollar in October, a level unseen since May 2020.
Despite the Canadian dollar’s recent 1.87% bounce to the upside against the U.S. dollar since Oct. 17, surging inflation, a hawkish Federal Reserve (Fed) and poor economic growth have contributed to U.S. dollar strength as a dominant 2022 theme.
However, six rate hikes from the Bank of Canada (BOC) in 2022 have not been enough to deter weakness against the U.S. dollar. Furthermore, the Canadian dollar’s decoupling from oil this year has also meant its weakness has not been mitigated through increasing oil prices as effectively as in previous cycles.
In comparison, macroeconomic headwinds have caused the greenback to roar in value against the Canadian dollar—in addition to most of its competitor currencies. Its destination as a safe haven amid heightened geopolitical risk and economic adversity has made the U.S. dollar a prime choice for investors seeking safety.
It is likely this, in addition to the current economic climate, will propel further Canadian dollar weakness.
The following review examines factors that have influenced this currency pair and provides some CAD to USD forecasts.
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US Dollar Performance and Drivers in 2022
U.S. dollar strength has been pervasive throughout 2022. The greenback surged to a 20-year high in September as it printed 114.10 on the ICE Dollar Index (DXY).
Used as an effective barometer to assess U.S. dollar strength or weakness compared to a selection of rival currencies, the index reflects a 14% increase at its yearly high.
As of Nov. 16, 2022, the below provides a snapshot of how the U.S. dollar has performed so far this year against its rivals:
- EUR/USD: One euro buys $1.04, a dollar increase of 8.87% on the year
- USD/JPY: One dollar buys 139 yen, a dollar increase of 22.38% in one year
- GBP/USD: One pound buys $1.18, a dollar increase of 11.63% in a year
- USD/CAD: One dollar buys $1.33 Canadian, a U.S. dollar increase of 6.22% on the year
The macroeconomic climate of 2022 has presented the U.S. dollar with the “perfect storm,” greatly bolstering its strength. With inflation at a 40-year high, seven successive Fed rate hikes have enabled an overall increase of 3.75% for the year, prompting a dramatic resurgence in U.S. dollar appetite from capital inflows seeking safety and exposure to subsequent Fed hikes.
The U.S. dollar is a counter-cyclical currency that has historically performed well at times of economic and political instability. Accordingly, the uncertainty stoked by the Ukraine war, soaring global inflation and labor shortages fueled by the Great Resignation have all further expedited U.S. dollar strength.
USD to CAD Forecast
A projected fall in inflation levels, leading to a more dovish monetary policy, could lead to future U.S. dollar declines. The U.S. dollar weakened sharply against the Canadian dollar in October after a 0.5% decrease in the expected annual rate of U.S. inflation was reported. The U.S. Consumer Price Index number exceeded expectations at 7.7%, a reduction from the anticipated 8.2%.
This increased capital outflows from the U.S. dollar, propelled by the “risk on” environment, saw investors favoring riskier asset classes over U.S. dollar safety amid the reduced chances of further Fed rate hikes. The U.S. dollar weakened by 1.44% in value compared to the Canadian dollar on the day of the release.
Furthermore, the Bank of Canada has not ruled out another “oversized” rate hike to counter inflation. For 2023, the International Monetary Fund’s (IMF) predicts a 4.2% increase in inflation in Canada, compared to a 3.5% U.S. increase. This, if proven to be broadly correct, in addition to a less hawkish Fed, could reinvigorate appetite for the Canadian dollar, causing it to strengthen.
Canadian Dollar to US Dollar 6-Month Forecast
When contemplating Canadian dollar to USD forecasts and predictions, remember that past performance does not guarantee future results.
As of Nov. 18, 2022, Wallet Investor, an algorithm-generated price prediction service, projects USD/CAD will achieve a closing rate of 1.310 in April 2023. In contrast, the Economy Forecast Agency, a long-term financial market forecast service, is more optimistic. It anticipates a USD/CAD trading range of 1.353 to 1.395 in April 2023, with a close at 1.374.
CAD to USD Long-Term Forecast
Long, medium and short-term U.S. dollar to Canadian dollar forecasts are shaped by current conditions and the available data. They can be adjusted at any time, in response to newly released market sensitive information.
The ING Group, a Dutch-based banking and financial services corporation, predicts 1.30 in Q4 for USDCAD in 2025.
Wallet Investor, which states on its website the “USD to CAD Forex pair is a bad long-term (one-year) investment,” is more pessimistic. The site projects a weaker U.S. dollar with a closing rate of 1.267 in December 2025 and 1.234 in November 2027, its maximum forecast horizon.
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Frequently Asked Questions (FAQs)
Why is the Canadian Dollar dropping against the US dollar?
There are various reasons driving the Canadian dollar’s weakness. Although both are hawkish, the 4% base rate set by the Fed is 0.25% higher than the BOC 3.75% rate—making the U.S. dollar a relatively more attractive choice for investors. Furthermore, in 2021, the OECD predicted the Canadian economy would perform the worst out of all advanced economies over the next decade.
In contrast, the U.S. dollar’s reputation as a safe haven amid the geopolitical uncertainty and economic headwinds that have characterized 2022 has boosted its appeal. Surging global inflation, soaring energy prices and the Russia-Ukraine war have combined and rejuvenated U.S. dollar appetite for investors fleeing to safety.
Will the CAD vs. USD go up or down in 2022?
As of Nov. 18, the Canadian dollar is down 5.76% against the U.S. dollar. Having made seven rate increases this year, it is unlikely markets will see Bank of Canada intervention until 2023. Therefore, it is unlikely the Canadian dollar will mitigate losses through hawkish monetary policy.
The National Bank of Canada (NBC) anticipates the Canadian dollar will reach 1.39 against the U.S. dollar in Q4. The Bank of America FX, Rates and Commodities Team has, less optimistically, projected 1.34 for the final quarter of 2022. This prediction is in line with Trading Economics, an online data provider, which expects the Canadian dollar to reach 1.34 by the end of the year.
CAD/USD forecast revisions could be made depending on how much the remaining economic data releases for Canada and the U.S. align with market expectations. The Nonfarm Payroll (NFP) release, scheduled for Dec. 2, tends to cause large swings in foreign exchange markets. It will be a significant influence, determining the Canadian dollar’s strength or weakness for the remainder of the year, depending on whether the number is above or below expectations.
Will the Canadian Dollar get stronger against the US dollar in 2023?
Canadian dollar forecasts are contingent on a variety of factors. The economic fortunes of both countries, prevailing rates of inflation and levels of Fed and Bank of Canada intervention will influence the strength of one currency against the other.
However, a poll launched by the Reuters News Agency reflects an increasingly bullish sentiment held by analysts for the Canadian dollar.
With recessions projected in both Canada and the U.S. next year, Canadian dollar strength will depend on how deep its recession is relative to its neighbor’s. If the Bank of Canada increases interest rates or the Canadian economy improves compared to the U.S. economy, this could increase the Canadian dollar’s strength.
Where can I exchange USD to CAD?
There are numerous online and traditional brick-and-mortar options. However, quoted exchange rates and transaction fees vary vastly, with airport kiosks often being the most expensive. Many offer the ability to exchange U.S. dollars into Canadian dollars and Canadian dollars back into U.S. dollars.
To exchange currency without paying huge fees, shop around. An online currency conversion calculator is an effective tool for making fast comparisons to secure the best rates available.
