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USD/CAD forecast: will the Canadian dollar retest 1.20?

By Kathryn Davies

12:10, 6 August 2021

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In this article:
Copper
Copper
3.7350 USD
0.0875 +2.400%
Gold
Gold
1751.48 USD
1.92 +0.110%
Oil - Crude
Crude Oil
80.28 USD
1.49 +1.890%

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USD/CAD

After declining steadily over the first half of 2021, the US dollar (USD)/Canadian Dollar (CAD) exchange rate reached an intraday low of 1.2008 on 1 June, before rebounding to an intraday high of 1.2801 on 19 July. Over the last few weeks, it‘s started to decline again, losing over 2.3% to hit 1.2449 on 30 July. At the time of writing, 5 August, the pair was trading at 1.2520.       

USD/CAD chart; YTD

In this article, we look at the main factors driving movements in the pair’s rate and consider analysts’ latest USD to CAD predictions.

Basics you need to know about the USD/CAD currency pair

The USD/CAD forex pair specifies how many Canadian dollars (the quote currency) are required to buy one US dollar (the base currency).

The CAD is Canada’s official currency. It’s known as a commodity currency, given that it’s strongly influenced by commodity prices, such as copper, aluminum, gold and oil.

Correlation between commodity prices and the value of the Canadian dollar

The USD reflects the health of the US economy. It’s the world’s major reserve currency, as well as a safe-haven asset, which often strengthens in a risk-off climate and declines when risk appetite rises.

Also referred to by traders as ‘loonie’, the USD/CAD pair is one of the forex market’s top five most-traded currency pairs.

What factors influence the values of USD/CAD?

In line with other forex pairs, the USD/CAD is influenced by economic and political factors on both sides of the border, in addition to central bank action and news. 

Should the Bank of Canada (BoC) look to rein in rising inflation and an overheating economy by tapering support or lifting interest rates, the CAD could advance. Similarly, a cautious Federal Reserve (Fed), one not ready to tighten monetary policy amid concerns over the strength of the economic recovery, could drag on the value of the USD. 

Central banks closely monitor macro-economic data, such as GDP, labour market reports, consumer price inflation, retail sales and consumer confidence, in order to make monetary policy decisions. In the current climate, COVID-19 numbers and vaccination rates are also influential.

A factor which sets the CAD apart from its major peers is its strong positive correlation to the oil price, which is priced in USD. Canada is one of the world’s largest oil producers. When the oil price rises, CAD’s value often advances, mainly because a large amount of Canada’s foreign exchange earnings are generated through crude oil sales. The large volumes of oil traded from Canada to the US boost demand for CAD, lifting the currency’s value.

USD/CAD (inverted) crude oil correlation; 25+ years

USD/CAD price analysis

As seen on the USD/CAD forex chart, the pair started 2021 trading around 1.2350, rising above 1.2700 on 4 January. The rate then steadily declined across the first half of the year as the CAD strengthened against the USD, reaching a low of 1.2008 in early June. 

USD/CAD chart; YTD

The CAD was boosted by surging oil prices across the first six months of 2021. Oil prices rallied over 40% from January to June as countries across the globe ramped up their vaccination programmes and pandemic restrictions eased. Mobility picked up and fuel demand surged.

EUR/USD

1.03 Price
-0.110% 1D Chg, %
Long position overnight fee -0.0028%
Short position overnight fee 0.0008%
Overnight fee time 22:00 (UTC)
Spread 0.00006

GBP/USD

1.19 Price
-0.050% 1D Chg, %
Long position overnight fee -0.0015%
Short position overnight fee 0.0001%
Overnight fee time 22:00 (UTC)
Spread 0.00013

AUD/USD

0.67 Price
+0.340% 1D Chg, %
Long position overnight fee -0.0017%
Short position overnight fee 0.0002%
Overnight fee time 22:00 (UTC)
Spread 0.00006

USD/JPY

139.44 Price
+0.500% 1D Chg, %
Long position overnight fee 0.0015%
Short position overnight fee -0.0042%
Overnight fee time 22:00 (UTC)
Spread 0.008

The Canadian dollar also found support from the BoC’s upbeat economic outlook, as the country emerged from pandemic restrictions. Back in April, the BoC forecast 6.5% GDP growth for Canada in 2021, and was the first of the major global central banks to begin tightening monetary policy by reducing its weekly asset purchase programme, a move which lifted demand for the currency.

In the meantime, the US economy experienced a steady recovery from the pandemic in the first two quarters of 2021. However, the Fed remained dovish, insisting that the economy wasn’t in danger of overheating and that rising inflation was temporary. The Fed’s cautious tone kept the USD under pressure.

After bottoming out at 1.2028 in early June, following that month’s Federal Reserve meeting, USD/CAD rebounded higher, hitting a peak of 1.2801 as the USD strengthened against the weaker CAD. 

At June’s meeting of the FOMC (The Federal Open Market Committee), the Fed kept monetary policy on hold, as expected. However, the Federal Reserve’s Chair, Jerome Powell, indicated that the central bank had held initial discussions about reducing the pace of bond purchases the Fed makes each month. In the weeks following the meeting, some policy makers started talking about working towards a process to scale back asset purchases. This shift to a more hawkish tone gave the greenback a boost.

More recently, the CAD has started to strengthen again against the USD. The rate declined by 1% over the last two weeks of July following the latest BoC monetary policy meeting. 

The Canadian economy fared better in the third COVID-19 wave than had been feared. As a result, economic data has been stronger than forecast and the Canadian central bank moved to reduce its weekly asset purchases from C$3bn to C$2bn. The central bank said: “The downside risks associated with the pandemic have significantly diminished.”

The COVID-19 vaccination rate in Canada has been impressive, with 60% of the nation's population fully vaccinated and 71% with at least one jab. This means that the Delta COVID-19 variant could be considered less of a risk.

Meanwhile in the US, the Delta variant is spreading rapidly, with over 100,000 new cases reported daily at the start of August, up five-fold from a month earlier. So far, there have been no public health restrictions, but the US vaccination rate is lower than in Canada – 50% fully vaccinated and 58% with at least one dose – suggesting that the new variant could present a greater risk to the economy. Should the US struggle to contain this wave, the country’s economic recovery could start to slow, and the Federal Reserve could drag its feet over tightening monetary policy.

USD/CAD forecast: can oil prices & central bank action boost CAD in the second half of 2021?

After some volatility in recent months, where could USD/CAD end the year? We take a look at analysts’ latest projections.

Analysts at ING reiterated their US to Canadian dollar forecast following July’s Bank of Canada monetary policy meeting. Analysts see the USD/CAD falling back to 1.20 by the end of the year thanks in part to the Canadian economy’s resilience and high vaccination rates. 

“We think that if our expectations that the BoC will end its asset-purchase programme by year-end proves correct, markets will be inclined to price in an earlier start of the hiking cycle in Canada. This should add to the already appealing carry profile of the loonie, which may prove a key factor driving some outperformance… We remain of the view that USD/CAD will trade below 1.20 by the end of 2021.”

Fiona Cincotta, senior market analyst at City Index, the retail arm of Stone-X, is upbeat on the USD/CAD outlook. In a note to Capital.com, she said: “The Canadian economy is rebounding after faring better than feared in the previous COVID wave. An impressive vaccine programme has lessened the Delta threat, so the BoC is likely to continue on a steady path to a less supportive monetary policy. Oil market developments will continue to have an important impact on CAD – 1.20 by the end of the year is a realistic target.“

However, other analysts think the downside correction has ended. According to a USD/CAD analysis offered by Benjamin Wong at DBS Bank, the US dollar remains in buy mode as long as the current correction doesn’t break below 1.2407 and 1.2356, the moving averages’ support. Should these supports hold, the pair could rise to 1.3067.

Analysts at RBC have adopted a more neutral stance. They consider that any boost CAD experienced from rising oil prices could be running out of steam, along with reduced investor appetite for riskier assets. They believe that “the market is overpricing rate hikes in Canada next year and are underestimating the odds of a move by the Fed.”  

Analyst USD/CAD rate predictions

 

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The main difference between CFD trading and trading assets, such as commodities and stocks, is that you don’t own the underlying asset when you trade on a CFD.
You can still benefit if the market moves in your favour, or make a loss if it moves against you. However, with traditional trading you enter a contract to exchange the legal ownership of the individual shares or the commodities for money, and you own this until you sell it again.
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