The Canadian dollar recently fell to its weakest level since March 2020, trading at 1.4323 per U.S. dollar. This decline reflects a combination of domestic political instability and widening bond yield gaps with the U.S. Moreover, surprising inflation data added more pressure on the loonie.
The loonie's value dropped 0.6%, translating to 69.82 U.S. cents, marking a significant low. Experts attribute this plunge to unfavorable macroeconomic sentiment and political uncertainty. Benjamin Reitzes from BMO Capital Markets noted, "The ongoing rally in Canadian yields relative to U.S. rates is the primary driver."
Canada’s political landscape has grown more uncertain following the abrupt resignation of the country’s finance minister. With less than a month until significant global events, this turbulence could severely impact Canadian exports.
Karl Schamotta, chief market strategist at Corpay, highlighted that the political dysfunction raises uncertainties for Canadian businesses and consumers. These challenges compound the issues already affecting investment and productivity growth.
Adding to the economic woes, Canada’s annual inflation rate dropped to 1.9% in November, down from October’s 2%. Although underlying inflation remains higher, markets anticipate another interest rate cut from the Bank of Canada in January.
Meanwhile, the 10-year Canadian bond yield eased by 4.2 basis points, further widening its gap with U.S. equivalents. This gap, now at 124 basis points, is the largest since 1994, according to LSEG data.
Oil, a cornerstone of Canada's exports, has also seen declining prices. It fell by 1.6% to $69.57 per barrel amid concerns over Chinese demand and anticipation of a Federal Reserve decision. Lower oil prices further weigh on Canada’s economic outlook, exacerbating challenges for the loonie.
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The Canadian dollar hit a nearly five-year low amid political turmoil and economic challenges. Learn more about the loonie's struggles.
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