The Canadian dollar has dipped below 70 cents U.S. for the first time since early 2020, as the fallout from Chrystia Freeland’s resignation as deputy prime minister and finance minister hits the currency.
Weakening Loonie Amidst Uncertainty
According to Nick Rees, a senior FX market analyst at MonFX Pte Ltd., a Singapore-based commercial foreign exchange specialist, "I think it’s largely political risk weighing on the loonie (today)." The Canadian dollar has fallen even more as the morning wore on and is now down 3.4 per cent since the United States election on Nov. 5 and 7.6 per cent year to date.
Strength of U.S. Economy and Currency
Economists have attributed the decline to the strength of the U.S. economy and its currency, as well as the widening gap between the Bank of Canada and the U.S. Federal Reserve’s lending rates. The U.S. dollar is more attractive to investors due to its higher interest rate, which stands at 4.75 per cent (at the upper bound), compared to the Canadian dollar’s 3.25 per cent.
Bank of Canada Rate Announcement
Rees believes that the Bank of Canada’s statement during its Dec. 11 rate announcement that it will likely slow the pace of any future interest rate cuts should support the loonie through to pre-inauguration day in the U.S. on Jan. 20. He also noted that Tuesday’s inflation data validates the Bank of Canada’s position, as the consumer price index in November slowed to 1.9 per cent, just under the central bank’s inflation target of two per cent.
Post-Inauguration Uncertainty
However, Rees thinks all bets are off for the Canadian currency post-inauguration, and that markets are "underestimating" the risk posed by Donald Trump’s threatened tariffs of 25 per cent on imports from Canada and Mexico into the U.S. Recommended from Editorial:
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- Looking ahead to 2025, whether or not Trump follows through on this promise is likely to be the key to (the Canadian dollar’s) fortunes longer term,’ he said in a note earlier this month. ‘If Trump follows through on his statements, then in our view USD/CAD could be trading at $1.50 by the end of next year,’ which means the loonie would be worth 66 cents U.S.
Key Factors to Watch
The Canadian dollar’s fortunes are closely tied to the actions of Donald Trump and the potential impact of tariffs on imports from Canada and Mexico into the U.S. Investors will need to keep a close eye on these developments as they unfold.
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