Given how close we are to our southern neighbors, and how often we travel back and forth from the US (as a collective), questions around the exchange rate between the Canadian Dollar and the US dollar come up.... a lot. 

 

When interest rates shot up in 2022, the Bank of Canada and the US FED moved almost in lock-step. The future path for each though, may prove to be different, and this could have a short term impact on what Canadians will pay for their US dollars. 

 

The US economy is loping along at a relatively decent clip, while things here in Canada appear to be stagnating. This economic divergence can mean a number of things, but for today's purposes, we are focused on what it might mean for interest rates. 

1- RBC Economics projects that the Bank of Canada will cut rates 4 times this year

2-  RBC Economics projects that the US FED will cut rates just once this year.

3- This indicates a future widening gap between interest rates

 

What does this mean? Well, all things being equal, if rates remain higher in the US vs Canada, that is where global capital will go. Should that be the case, it will push up demand for US dollars, and ultimately increase the price relative to the CAD.

 

If we hold everything else equal, this points to the US dollar potentially reaching a value of 1.40CAD in the short term. It is important to remember that there are other factors involved, however rate policy divergence does have influence on the price relationship.