Updated March 2018
As shown in Figure 1.9 [Tableau], the Canadian dollar appreciated relative to the U.S. dollar in 2017 in response to two interest rate hikes by the Bank of Canada. After nearly seven years with no changes to the interest rate, the Bank of Canada raised the interest rate by 25 basis points in July to 0.75 per cent and again in September to 1.00 per cent, reversing the emergency rate cuts implemented in 2014 and 2015 following the downturn in oil prices. In January 2018, the Bank of Canada announced another interest rate increase to 1.25 per cent. After increasing four times since December 2016, the U.S. Federal Reserve interest rate target range ended 2017 between 1.25 and 1.50 per cent. Additional increases are anticipated in 2018.
After the Canadian dollar reached a ten-month low in December 2016 as a result of the U.S. Federal Reserve raising short-term interest rates by 25 basis points, the Canadian dollar slowly started to appreciate in January 2017, trading at US$0.76 compared with US$0.70 in January 2016. The exchange rate fell in March and then again in May due to falling oil prices and uncertainties that affected the Canadian economy, including the U.S. government’s economic policies and the North American Free Trade Agreement negotiations. After the Bank of Canada raised the interest rate to 0.75 per cent in July, the exchange rate rose to over US$0.80 in late July, the highest level since June 2015, strengthened by higher oil prices and an increase in inflation. After the interest rate increased to 1.00 per cent in September, the exchange rate briefly rose to US$0.825 in September before falling to US$0.81 later in the month and then to US$0.79 in the beginning of October due to speculation about a potential increase in the U.S. interest rate and to an increase in Canada’s trade deficit, respectively. With the economic outlook looking less optimistic, the Bank of Canada kept interest rates constant for the rest of 2017. Overall, the exchange rate averaged an estimated US$0.77 in 2017.
In 2018, the exchange rate is expected to slightly increase to US$0.78 as the anticipated U.S. federal interest rate hikes in 2018 are expected to offset any Canadian interest rate hikes and a slightly higher oil price. Over the ten-year forecast period, the exchange rate is forecast to increase from US$0.78 in 2018 to US$0.85 in 2022 and remain at that level through 2027 based on higher forecast crude oil prices and monetary policy normalization, which is well underway in Canada, the United States, and the European Union, resulting in convergence in global monetary policy rates. Uncertainties about the outcomes of international trade negotiations could affect the exchange rate. A shift to a protectionist trade policy in the United States that includes tariffs or other barriers to trade could affect Canadian exports and depreciate the Canadian dollar; however, projected stronger oil prices over the forecast period are expected to offset these uncertainties.
For information on how the exchange rate is derived, see the Methodology section.