Considering the growing economy of Canada, you might wonder if the CAD is stronger than the USD in 2021. The truth is that the strengths of both currencies vary, depending on various economic factors like inflation. However, the USD is still stronger than CAD.
Although the Canadian dollar (CAD) is strong, the U.S. dollar (USD) is stronger. So, any person with the USD will buy more goods than someone with CAD when they exchange the currencies for another currency. It is because the USD’s purchasing power is higher.
This guide looks at why the Canadian dollar is weaker than the U.S. dollar in 2021. We’ll highlight a few reasons why the U.S. dollar is stronger than the loonie. But before we get started, it’s essential to understand the relationship between the two currencies.
Understanding the USD/CAD Relationship in 2021
The USD/CAD currency pair shows the quoted rate for converting the U.S. dollar to the Canadian dollar. In other words, it represents the amount of Canadian dollars one can get for every U.S. dollar. This site: https://www.knightsbridgefx.com/how-much-is-1-us-in-canadian/ shows the real-time USD/CAD exchange rate.
So, how much is one U.S. dollar in Canadian dollars?
When the USD/CAD exchange rate is 1.26, then it means 1 U.S. dollar is equivalent to 1.26 Canadian dollars. In other words, you will get 1.26 Canadian dollars for every U.S. dollar when you exchange the currencies. So that makes the USD stronger than CAD. Here is where you can convert CAD to USD.
For example, when you convert $1,000 U.S. dollars, you’ll end up with an extra $260 in Canadian cash. Of course, this is good news for Americans visiting Canada, thanks to their USD currency which has a higher purchasing power than the Canadian dollar.
There’s no doubt that the USD/CAD pair has attained parity in various circumstances because of the business ties between the U.S. and Canada. However, the U.S. dollar has been remaining stronger than the loonie. We are about to find out the reasons.
Why the Canadian Dollar is Weaker than the U.S. Dollar
The CAD’s downward trajectory relative to the USD began in 2015 when the Canadian dollar sank tremendously against the U.S. dollar. From that time, it has been very tough for the loonie to surpass the U.S. dollar. Notably, many factors have contributed to that.
One factor responsible for the fluctuating USD/CAD exchange rate is the plunging oil prices. Economic factors like interest rates, inflation rates, and commodity prices have also influenced the upward and downward pressure on the USD/CAD exchange rate.
Now, let’s look at the reasons the CAD has always been weaker than the USD.
Canada’s Plunging Oil Prices
Oil is Canada’s major export, tying up the strength of the Canadian dollar to oil prices in the global market. It is why the Canadian dollar started weakening in 2014 when OPEC failed to cut oil production despite the decreasing demand for oil on the global market.
The Organization of the Petroleum Exporting Countries (OPEC) had a meeting with all the stakeholders to discuss the falling demand for oil despite the high supply. Everyone expected the organization to cut oil production to reduce supply, but it wasn’t the case.
If OPEC had cut oil production, the oil prices would have gone back to normal since oil consumers would have fought for the limited oil supply. But unfortunately, OPEC didn’t reduce oil production. This affected many oil-producing countries, including Canada.
After OPEC’s decision, oil prices decreased dramatically worldwide, negatively affecting the currencies of oil-exporting countries. Since Canada is one of the major oil exporters to the U.S., the plunging prices impacted the USD/CAD exchange rate up to date.
Any changes in the demand and supply of oil affect the USD/CAD exchange rate. For example, if oil prices fall, it will be cheaper for the U.S. to import oil from Canada. On the other hand, oil exporters in Canada will find it tricky to offer competitive oil prices.
Low oil prices are beneficial to the United States but detrimental to Canada. Currently, the CAD is weaker than the USD because the global demand for the U.S. dollar is very high. However, since the oil prices are plunging, the flow of money in CAD is lower.
Canada’s Economy is Weaker than United States’ Economy
After the historic plunge of global oil prices in 2015, the U.S. dollar gained strength over other currencies, including the CAD. A plausible explanation for that is the strengthening economy of the United States. Besides, the U.S. Federal Reserve increased the interest rates, strengthening the USD further against the CAD.
Another economic factor that has strengthened the U.S. dollar against the CAD is the U.S. government’s high-yielding bonds. Conversely, the yield of Canadian government bonds stayed weak, forcing many foreign investors to invest in U.S. high-yielding bonds.
When many foreign investors buy U.S. government bonds, they have to purchase U.S. dollars, putting more upward pressure on the U.S. treasuries. Consequently, the United State’s economic performance has strengthened against Canada’s economy.
Higher Interest Rates in the United States than Canada
Changes in interest rates in the United States and Canada can affect the USD/CAD exchange rate. For example, the U.S. Federal Reserve provides higher interest rates than the Bank of Canada on government securities such as high-yield treasury bonds.
With higher interest rates in the United States than in Canada, the USD has appreciated steadily against the loonie over time. It’s because higher interest rates attract foreign capital due to higher lending rates. As a result, it increases the USD exchange rate.
To strengthen the Canadian dollar, the Bank of Canada needs to increase Canada’s prime lending rate to raise the interest rate offerings. As a result, the demand for the Canadian dollar will rise since foreigners will be willing to invest in the country.
Final Words
Since 2014, the U.S. dollar has remained stronger than the Canadian dollar due to the United States’ stronger economy than Canada’s up to date. Other factors contributing to that are the plunging oil prices in Canada and higher interest rates in the United States.
