What’s going on here?
The Canadian dollar has dropped to a two-month low against the US dollar, dragged down by an eight-day losing streak – the longest since July – amid investor concerns over potential rate cuts by the Bank of Canada.
What does this mean?
The loonie has taken a significant hit, down 1.4% this week – its sharpest decline since March 2023 – as investors grapple with mixed economic signals. On one hand, Canada saw a stronger-than-expected addition of 47,000 jobs in September, beating predictions of a 27,000 rise. On the other hand, a gloomy Business Outlook Survey from the Bank of Canada suggests lingering weak demand. This has led to market buzz about a possible 50 basis-point rate cut at the upcoming meeting on October 23, with a rough 50% chance priced in. Scotiabank’s lead currency strategist points to rising pressure for rate easing, which has widened the gap in swap and bond spreads in favor of the US dollar, making it tough for the loonie to rebound independently.
Why should I care?
For markets: A tale of two central banks.
The Bank of Canada might slash rates to neutral levels faster than its US counterpart amid fears of slow economic growth keeping inflation below target. This creates a wider gap between Canadian and US bond yields, pushing investors toward stronger greenback-backed assets.
The bigger picture: Gauging economic winds.
Ahead of the Thanksgiving holiday, Canadian bond yields have dipped, with 2-year yields down to 3.077%. This trend underscores broader concerns about the Canadian economy’s health, as analysts brace for how potential rate cuts could reshape Canada’s economic landscape.
