USD to CAD Forecast

History of the USD to CAD

USD to CAD, also known as the loonie, is a popular forex pair because of the strong business relationship between the two countries. They both are parts of the United States, Mexico, and Canada Agreement (USMCA), which replaced NAFTA in 2020. As a result, the two countries do goods trade every year.

The exchange rate is mostly affected by three main factors. First, the actions of the Federal Reserve and BoC. Historically, because of the role of the USD as the global currency reserve, the Fed has more weight compared to the BoC.

Second, the pair is also often impacted by the prices of crude oil. The US is the biggest oil producer while Canada is the fourth. However, in terms of exports, Canada exports most of its oil to the US. Therefore, higher oil prices have often resulted in a stronger Canadian dollar.

Latest USD to CAD forecast

The USD/CAD exchange rate surged to a two-year high of 1.3982 in 2022 amid broad dollar strength. At the time, the US dollar index, which tracks the currency against a basket of other currencies, rose to $115, the highest level since 2000.

In all, the pair jumped by over 12% between January and October as the Fed and BoC announced the peak of their rate in decades. They also embarked on a quantitative tightening (QT) program that reduces their balance sheets.

Fed and BoC change of tune in 2023

2023 will likely be a different year for the pair because of the rising recession worries and change of tune by the two central banks. Inflation is also showing signs of easing. In January, data from the US revealed that the inflation dropped to 6.5% in December and it was in the sixth straight month.

In January, the BoC decided to hike interest rates to 4.5% and said that it would hold off further increases. It attributed the pause to signs that inflation was easing and that further rate hikes would lead to a hard landing.

In the same month, the Fed decided to hike by 0.25%, the smallest increase in months. It brought the official cash rate between 4.50% and 4.75%. Most economists expect that the Fed will hike by 0.25% in March and then pause more increases; however, some expect that the bank will start cutting rates in Q4.

Therefore, a change of tone by the Fed and BoC could lead to a reversal of fortunes for the USD to CAD exchange rate in 2023. Economic data support a more dovish tone from the two central banks.

Crude oil prices to ease

The other key catalyst for the USD to CAD exchange rate will be crude oil prices. The West Texas Intermediate (WTI) peaked at $129 in February 2022 following Russia’s invasion of Ukraine. Since then, it has been in an overall bearish trend, dropped by 41%, and formed a death cross, where the 50-day and 200-day moving averages make a bearish crossover.

Oil prices are being influenced by robust production by OPEC and other countries. On the demand side, China’s reopening is expected to have a positive impact on oil prices. However, with global recession risks rising, there is a likelihood that prices will continue falling in 2023.

Therefore, in theory, falling oil prices should be positive for the USD to CAD exchange rate because they will mean less foreign exchange for Canada. However, low oil prices mean that inflation will continue easing, which will push the Fed and BoC to ease further.

Technicals point to more weakness

On the chart below, we see that the USD to CAD price has been in a strong bearish trend after peaking at 1.3979 in 2022. It has dragged below the 23.6% Fibonacci Retracement level and is now at the 38.2% retracement point.

The pair has crossed the 50-day MA and is slightly above the 200-day MA. Therefore, with a death cross about to happen, the pair will likely drop to the psychological level at 1.3000.

Transferring USD to CAD

The US and Canada have a close trading relationship. In 2020, the US exported goods worth over $255 billion to Canada, representing about 18% of the total American exports. In the same period, Canada exported goods worth over $270 billion.

Further, as bordering countries, many Canadians are living in the US and sending money home and vice versa. As a result, the total cross-border payments have always been high.

Higher trade volumes between the two countries mean that there is a lot of liquidity in the USD and CAD exchange rates. As a result, the spread between the bid and ask prices tend to be a bit tight, meaning that transfer costs are not at all that high.

The USD/CAD exchange rate is usually not volatile because of the stability of the two countries. This is unlike the rates between the US dollar and emerging market currencies like the Turkish lira and Russian ruble.

Is it a good time to buy USD with CAD?

Will you get a decent rate?

In February 2022, the USD to CAD exchange rate was trading at 1.3321. In forex quotes, this means that 1 US dollar is equivalent to 1.3321 Canadian dollars. At its peak in October last year, 1 USD was equivalent to 1.3980, meaning that the USD has lost its value.

As explained above, there is a likelihood that the pair will continue falling in 2023 as the greenback weakens. Therefore, it is a much better time to buy the US dollar than when it was at its two-year high in October 2022.

Can you wait for a better rate at some point?

The USD/CAD price will likely continue to fall in the near term. As such, you can decide to do dollar cost averaging (DCA), which involves regularly investing a fixed amount of money into the asset irrespective of the price.

USD to CAD 6 month forecast - next 6 months analysis

The USD to CAD exchange rate has numerous catalysts in the next six months. The most important driver for the pair will be the actions of the Fed and BoC. Economists believe that the two banks will pause their rate hikes in the first half of 2023. This view is supported by the fact that American and Canadian inflation is easing.

Canada consumer price index (YoY)

At the same time, there are elevated risks of a recession. As such, more rate hikes in the US and Canada could lead to a hard landing. To prevent that, the two central banks will likely pause their rate hikes. If this happens, and since the Fed carries more weight, there is a likelihood that the USD/CAD pair will continue falling.

Another main catalyst that could drag the pair even lower is the debt ceiling issue. With a divided congress, there is a high likelihood that Joe Biden will struggle to find the votes he needs to pass his budget. A US credit rate downgrade or a default will lead to more dollar weakness.

Therefore, as mentioned in the technical analysis above, the pair will likely continue falling as a paradigm shift in monetary policy changes. This will likely lead to a risk-on sentiment similar to what happened in 2020 when the US dollar index plunged.

You can take advantage of this US dollar weakness by leveraging the concept of dollar cost averaging (DCA). By buying the US dollar as it drops, you will benefit as it rebounds again. Historically, the USD/CAD and other forex majors tend to move in cycles, meaning that the USD will ultimately bounce back.

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