3 Factors Suggest that CAD to USD Exchange Rate Could Collapse
The CAD to USD exchange rate could collapse to its 2002 lows, to around 0.62. Fundamental and technical analysis both suggest a dire outlook for the Canadian dollar against the United States dollar.
First of all, understand that there is interest rate disparity between the U.S. and Canada.
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As it stands, we see that the U.S. Federal Reserve is on track to raise interest rates while the Bank of Canada seems adamant about doing the opposite. In situations like these, the currency of the country with lower interest rates loses value.
The U.S. federal funds interest rate currently stands at 0.75% and is expected to rise. The interest rate set by the Canadian central bank sits at 0.50% and is expected to go lower. This won’t end well for the CAD to USD exchange rate.
Recently, the Bank of Canada Governor Stephen Poloz said, “Yes, a rate cut remains on the table.” (Source: “Bank of Canada says rate cut an option amid concern over Trump policies,” The Globe and Mail, January 18, 2017.)
Don’t take this lightly whatsoever.
Second, it’s important to pay attention to the new U.S. administration. President Donald Trump has made it very clear that he wants to renegotiate/repeal international trade agreements such as the North America Free Trade Agreement (NAFTA).
Let it be very clear: the Canadian economy exports a significant amount of goods and services to the United States. With NAFTA out of the picture, exports from Canada to the U.S. could decline, which would impact Canadian economic growth.
If this is something that materializes, or even if the Trump administration merely forms a committee to discuss amending or dissolving NAFTA, it will have consequences for the CAD to USD exchange rate.
Furthermore, the chart below predicts a much lower Canadian dollar ahead.
Chart courtesy of StockCharts.com
There are several developments that investors need to pay attention to.
Look at the black line on the chart above. The support level that broke in mid-2015 remains broken, around 0.785. This level was retested earlier in 2016, but failed to break higher. This is bearish.
Another interesting fact is that the 200-week moving average and the 50-week moving average are above the price. At the very core, this says that—both in the long term and the short term—trends are pointing downward.
Also, look at indicators at the bottom and the top of the chart.
The indicator at the bottom of the above chart is the momentum indicator, called moving average convergence/divergence (MACD). It’s trending downward, suggesting that there’s bearish momentum and, therefore, the CAD to USD exchange rate could go lower.
The indicator at the top is called the relative strength index (RSI). It is trending lower as well. This suggests that bearish sentiment prevails.
CAD to USD Exchange Rate Outlook 2017: Dire Outlook Ahead
This may sound bold, but it wouldn’t be shocking if 2017 is the year when the Canadian dollar plummets to 0.62 against the U.S. dollar. All the signals are lining up perfectly for this move.
What will change my outlook on the Canadian dollar? For this to happen, what I have said earlier would have to reverse: the Bank of Canada talks higher interest rates, NAFTA remains intact, and the CAD to USD exchange rate moves above 0.80 and remains above it.
