The Canadian Dollar (CAD) has had a tough time holding its ground against the US Dollar (USD) in recent times. In a risk-averse environment, Canadian economists believe it will continue to struggle. Commerzbank, one of the leading economic research institutions, has recently adjusted its forecasts for the CAD’s recovery potential, stating that it remains limited in the medium-term.
The CAD itself is a vital global currency, reflecting the fluctuations in the value of one of the world’s most important commodity exports, crude oil. The USD, on the other hand, is the world’s most traded currency, partly due to the strength of the US economy, which has a massive impact on financial markets globally.
The weakened CAD can be attributed to a range of factors, including the ongoing COVID-19 pandemic’s economic impact. However, the news of the US Federal Reserve’s decision to keep its interest rates near-zero for an extended period has had a significant impact on the CAD. According to analysts, this decision gives the USD an added advantage, which the CAD is unlikely to overcome anytime soon.
Market jitters on a global scale have also increased risk aversion among investors, which is not good news for the CAD. Risk-averse investors typically focus on buying USD, which further amplifies the CAD’s problem. All these factors combined have led Commerzbank to decrease its rating of the CAD’s recovery potential.
However, the Canadian economy has some unique strengths, which offer some hope for its recovery, despite the challenging environment. Let’s have a closer look at what these strengths are and how they can help the CAD regain its currency value.
Firstly, Canada’s political and economic stability is of immense importance in the global marketplace. As one of the world’s largest countries, it has a vast market of consumers with high purchasing power. Besides, it is among the wealthiest countries globally, with diverse sources of income that include manufacturing, natural resources, and services.
Additionally, International trade plays a crucial role in Canada’s economic activity. In 2019, Canada’s overall trade-in goods and services equaled up to 172% of its Gross Domestic Product (GDP). Over 75% of Canada’s goods exports go to the United States, making it one of the United States’ most vital trading partners. These trade links create an opportunity for the CAD to recover from its current slump through increased exports and trade activities.
Furthermore, Canada’s central bank, the Bank of Canada (BoC), has been maintaining a relatively stable monetary policy aimed at stimulating growth while keeping inflation in check. Historically, the BoC has maintained a higher interest rate than the US Federal Reserve, which has typically buoyed the CAD’s value against its US counterpart. In addition, the BoC’s reliance on forward guidance and regular communication with the public is also essential in maintaining investor confidence in the long term.
Finally, Canada has a well-educated workforce with a robust financial system, which assures investors of the country’s ability to navigate through uncertain economic times. The Canadian government has also introduced several measures to keep the economy afloat during the COVID-19 pandemic. These measures include tax cuts, direct cash transfers to citizens, and support for businesses. Such measures help to boost investor confidence in the country’s economy, which ultimately benefits the CAD.
In conclusion, the CAD is facing a challenging time in a risk-averse environment amid global jitters, alongside other economic factors. However, Canada’s political stability, trade links, monetary policy, and government support measures are significant strengths that offer the potential for the CAD’s recovery. The CAD is indeed in for an uphill battle against the USD, but it is a battle worth fighting. As the global economy recovers, it’s possible that the CAD will regain its strength among the world’s major currencies.
