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The Canadian dollar (CAD) has been making headlines lately for its recent dip, especially compared to the U.S. dollar (USD). While CAD had a strong run earlier this year, it’s been under pressure recently. Here’s why:
What’s Happening with CAD?
In the past couple of weeks, the CAD has seen some sharp moves against the USD, after doing quite well through August. Despite rising equity markets and strong oil prices (which typically boost CAD), it’s been falling behind.
Shift in Policy Outlook
The key reason behind this weakness is a shift in the policy outlook. While Canada’s economy has its strengths, the policy landscape is now overshadowing them. The U.S. dollar is getting a big boost from strong policy developments, especially as other countries—like Canada, the UK, and New Zealand—are facing expectations of more cautious, or “dovish,” monetary policies.
Challenges for Pro-Cyclical Currencies
The CAD is a pro-cyclical currency, meaning it tends to do well when the economy is growing and market conditions are favorable. However, when monetary policies tighten, like they are now, these currencies often struggle. As the market expects the Bank of Canada to take a more cautious approach, it’s adding downward pressure on CAD.
Rate Cut Expectations
Goldman Sachs expects the Bank of Canada to cut rates by 25 basis points in the near future. This dovish shift contributes to the CAD’s current weakness. That said, the currency may find some support as cyclical factors (like oil prices and broader economic trends) could help stabilize it in the longer term.
The Bottom Line
Overall, the recent weakness in the CAD makes sense. A policy shift between the U.S. and Canada is driving this divergence, and while the CAD faces challenges due to monetary policy, it may stabilize in the future, thanks to the underlying strength of the Canadian economy.
