Today, the Canadian dollar (CAD/USD) exchange rate against the US dollar approached its five-month high on Thursday, driven by rising oil prices and the pause in interest rate cuts by the Bank of Canada. The Canadian dollar rose slightly by 0.1% that day, trading at 1 CAD to 1.3845 USD (or 72.23 cents), with a cumulative gain of 0.1% for the week, poised to achieve seven consecutive weeks of gains — the longest streak since May 2021.

On Monday, the Canadian dollar briefly reached 1.3827, the highest level since November 6 last year. Mark Chandler, chief market strategist at Bannockburn Global Forex, pointed out that the recent strength of the Canadian dollar was due to the broad decline of the US dollar. Due to market concerns over the economic impact of tariffs and capital outflows, the US Dollar Index fell to a three-year low last week.

"The 200-day moving average for the Canadian dollar against the US dollar is above the 1.40 mark, and I think this is a short-term top," Chandler said. "Although it may test this point, the next major trend still tends to be downward."

As crude oil prices, a key export commodity for Canada, surged by 3.5% that day to $64.63 per barrel, concerns over supply were triggered by new sanctions imposed by the US on Iranian oil exports. The Bank of Canada announced on Wednesday (April 16) that it would maintain its benchmark interest rate at 2.75% (the first pause after seven consecutive interest rate cuts) and stated that uncertainty over US tariff policies prevented routine economic forecasts from being made.

Despite tensions in Canada-US relations, Canadian investors set a record in February by purchasing US stocks, while the US stock market hit new historical highs during the same period.

In the bond market, the Canadian government bond yield curve steepened as markets closed early ahead of Good Friday. The 10-year government bond yield rose by 3.9 basis points to 3.118%, recovering from an eight-day low of 3.073% on Wednesday.

However, experts are concerned about the continuous rise in the Canadian dollar, fearing it may not be a good sign.

The Canadian dollar exchange rate presents a delicate balancing act for Canada. On one hand, a weak currency can make exports cheaper; on the other hand, a strong Canadian dollar makes imported goods more affordable for Canadians.

According to a report by the Financial Post, William Robson, president and CEO of the C.D. Howe Institute, frankly admitted, "Portraying Canada as a safe haven seems somewhat far-fetched given our close ties with the US economy. However, investors selling US bonds might consider: 'Although yields are affected, why not allocate some assets in Canadian dollars with better credit ratings?'"

The seesaw effect of exchange rates is evident. On one hand, a weaker Canadian dollar can enhance export competitiveness; on the other hand, appreciation of the domestic currency makes imported goods cheaper. This delicate balance has the Bank of Canada walking on eggshells — maintaining the overnight lending rate at 2.75%.

Karl Schamotta, chief market strategist at Corpay, noted that the market is comprehensively reassessing the exceptional position of the US economy, with global investors competing to find alternatives. "As investment flows diversify, Canada, Europe, and Japan will all benefit." He wrote in an email.

The suspension of interest rate hikes by the Bank of Canada also played a role in the net appreciation of the Canadian dollar against the US dollar. He mentioned that policymakers are highly concerned about repeating the post-pandemic inflation scenario.

For the Canadian dollar, which was mired in a slump last year, the current trend is nothing short of a turnaround. Since it fell to 68.8 cents on January 31 (even below pandemic levels), the Canadian dollar has rebounded by 4.9%. The gloom caused by the sharp drop in September due to Trump's rising popularity is gradually fading away.

At that time, the Canadian dollar traded around 74 cents, but investors rushed into the US dollar due to their belief in Trump's tax cuts and deregulation policies benefiting the economy and the market. The situation was reversed by tariff policies — the US Dollar Index, which measures the basket of major currencies including the Canadian dollar, has fallen by 9.4% since mid-January.

"Macroscopically speaking, North American currencies are depreciating relative to other global currencies," Robson said. "The status of the US as the safest debt securities provider and the main issuer of global settlement currencies has never been questioned for decades, but now faces challenges, making it difficult for investors to decide."

A stronger Canadian dollar will have a ripple effect. Nima Billou, assistant vice president of energy, utilities, and natural resources at Morningstar Inc., pointed out that a stronger Canadian dollar is detrimental to Canadian oil producers because crude oil exports are priced in US dollars.

In his report, he stated: "The reality faced by producers is that WTI crude oil is priced in US dollars. When converted into Canadian dollars, their income from local benchmarks will decrease as the Canadian dollar strengthens." He added that every 1 cent increase (or decrease) in the Canadian dollar would correspondingly increase (or decrease) the cash flow of Canadian producers by 1.5 billion CAD.

Robson previously mentioned in a column of the Financial Post (when the Canadian dollar was weaker against the US dollar) that the weak currency he referred to as "bitter medicine" could alleviate the impact of US tariffs because Canadian goods become naturally cheaper when converted into US dollars.

But Davenport emphasized that the Canadian dollar exchange rate presents a delicate balancing act for Canada: a weak currency promotes exports, while a strong currency enhances national purchasing power. "Increased imports brought by enhanced purchasing power... can hinder the Canadian economy. It may not necessarily boost overall GDP, whereas a weaker Canadian dollar promotes exports and provides a buffer for the economy."

However, since mid-November, the Canadian dollar has fallen by 7.5% against the euro and 7.4% against the Japanese yen. Robson pointed out: "To some extent, there is a ray of hope for Canada — our export products are becoming more internationally competitive." He considered this particularly important because Canada is striving to diversify trade to reduce its severe dependence on the US market.

Robson concluded: "Trade diversification is part of the solution. A weaker Canadian dollar against other currencies like Europe and Asia actually helps — if exports to the US are blocked, we urgently need to expand exports to other markets."

Original source: https://www.toutiao.com/article/7494471866619331112/

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