Interest Rates - Key Drivers of the USD/CAD
Interest rates set by the world’s Central Banks are one of the key drivers of currency trends and major rate fluctuations. In the United States, the overnight rate is referred to as the federal funds rate, while in Canada, it is known as the policy interest rate.
The overnight rate is a firm indicator of the health of a country’s overall economy and banking system. The overnight rate, in turn, has an effect on employment, economic growth, inflation, and currency exchange rates.
Understanding where the major banks forecast both Canadian and U.S. interest rates to go is arguably the most relevant information you could watch in terms of the direction of the USD/CAD exchange rate moving forward.
In the chart you will see that the general consensus across the board from the five major Canadian banks is that they expect the Bank of Canada to hold rates steady, with the small possibility of a single rate cut as far out as Q2 2016, while the expectations are unanimous that during this same period the Federal Reserve will raise rates by approximately 3/4 %. If the next year pans out as these banks forecast, it may be some time before we see a “strong” Canadian dollar again. For more information on how you can protect yourself against long term currency trends against your favor, watch our short
Forward Contract Video