CAD–USD Exchange Rate

“Forecasting exchange rates has a record of failure second to none.”
— Paul Krugman

Even if you have never moved across the border, just by crossing the border, buying imported US goods, or investing internationally, you have felt the effects of the CAD-USD relationship. In the cross-border world especially, the Canadian to U.S. dollar exchange rate matters immensely, but its drivers are often little understood, relative to its importance. While much attention is paid to recent movements, often little is done at the individual level to mitigate currency risks. A stronger or weaker loonie has the potential to affect everything from relocation decisions to ultimately the lifestyle you can afford today and in retirement based on portfolio investment returns.

For historical context, Canada went off the gold standard in 1929, prior to which the value of the dollar was fixed to the price of gold. The Canadian dollar subsequently alternated between being fixed to the USD, and floating. Since May 1970, the Canadian dollar has had a floating exchange rate, providing monetary policy independence, at the cost of the microeconomic benefits that a pegged or common currency might provide.

The Canadian dollar hit an all-time low of 69.13 cents CAD/USD on February 4, 1986, amidst the backdrop of separatism and rising inflation. Comparatively, at the height of the commodity boom, the Canadian dollar reached $1.06 CAD/USD on July 21, 2011, (almost equalling the August 20^th, 1957 all time high of $1.0614 CAD/USD).

A floating currency’s value is not set by a government but instead fluctuates freely based on supply and demand in the global foreign exchange (Forex) market with their worth determined by market forces, making them susceptible to changes in global demand for goods, services, and assets. This can lead to substantial swings, and in total, there have been three peak-to-trough CAD/USD declines of over 30% since 1970.

The Bank of Canada and the U.S. Federal Reserve set interest rates that influence investor behavior. Higher rates in one country attract more capital, strengthening that country’s currency. If U.S. rates rise faster than Canadian rates, or if there exists a substantial differential, then the USD usually gains against the CAD.

Canada and the U.S. are each other’s largest trading partners. A Canadian trade surplus (selling more to the U.S. than buying) supports the loonie, while a trade deficit can weaken it. Stronger Canadian GDP growth also tends to lift the CAD. Trade agreements, tariffs, government budgets, and even elections can sway expectations and move exchange rates in either direction.

Canada is also a resource-heavy economy, and the dollar is closely tied to the prices of natural resources, especially energy. Crude oil is the largest single contributor of foreign exchange to Canada, and its share changes with the price movement. When oil prices rise, global demand for Canadian dollars tends to increase, pushing the CAD higher. When oil falls, the opposite happens. This is why the loonie has been called a commodity or “petro-currency.”

Currencies don’t only drift based on fundamentals, as buying and selling is also based on sentiments and expectations. In times of global uncertainty, investors flock to certain currencies seen as a “safe haven” to park their funds, which can weaken the CAD, given that the U.S. dollar is considered the ‘reserve currency of the world.’ The Canadian Dollar more recently also experienced strength as a haven currency, during the Global Financial Crisis, which disproportionately affected the U.S.

On the level of the individual, there are many strategies to moderate the impact of currency movements. You can match your income and expenses in the same currency as a natural form of hedging, for example, by paying U.S. dollar expenses in USD, to avoid conversions. Many banks and fintech platforms offer accounts that let you hold balances in CAD, USD, and other currencies.

You can also invest in investments that use financial tools that hedge against currency movements using options. This essentially amounts to insurance against negative moves in the exchange rate. This does come at a cost however, as you pay a small premium for the right (not obligation) to exchange at a set rate later. This is helpful when you want downside protection but still want to benefit if the rate moves in your favor. Non-hedged investments across multiple currencies or regions can be held to spread or diversify your currency exposure. If one currency weakens, gains in another may offset the impact.

If you send money abroad regularly or anticipate significant future expenses, such as buying a home in another currency, then transferring smaller amounts on a schedule can reduce the risk of hitting a single “bad” exchange rate, by dollar-cost averaging over time.

In summary, the CAD–USD exchange rate is shaped by a mix of commodity prices, central bank policies, trade flows, and investor psychology. Since these factors can shift daily, exchange rates are inherently unpredictable. The key is not to forecast perfectly, but to plan for the certain uncertainty. MCA Cross Border Advisors Inc. can you help you do just that.