Canadian Dollar Declines to Lowest Point in Over Four Years Due to Yield Spread Pressure

A Troubling Moment for the Canadian Dollar

By Fergal Smith

Ah, joyous Toronto, where the Canadian dollar has taken quite a historical tumble against its American cousin. As of Thursday, our beloved loonie, alas, weakened to a 4-1/2-year low. This unfortunate turn of events can be largely attributed to broad-based gains by the robust U.S. dollar, while the disparity between U.S. and Canadian bond yields has only exacerbated our currency’s feeble state.

A Currency Under Pressure

As Canadians sipped their morning tea, the loonie was trading at a rather disappointing 1.4190 per U.S. dollar, or merely 70.47 U.S. cents. It even touched its weakest since the bygone days of April 2020 at 1.4199. Marc Chandler, the seasoned chief market strategist at Bannockburn Global Forex LLC, remarked upon the loonie’s predicament, attributing its decline partly to the broad strength of the American dollar. Business Times

Interest Rate Dynamics

Our loonie, it seems, is not only sensitive to the whims of the broader market. It also dances to the tune of the U.S.-Canadian 2-year interest rate differential, growing more sensitive as the gap widens. The U.S. dollar, as sturdy as ever, experienced an impressive ascent for the fifth consecutive day. This vigorous growth followed both a surprisingly heated U.S. inflation report and the European Central Bank’s decision to cut interest rates for the fourth time this year. Central Banking

Bank of Canada’s Strategy

Meanwhile, on our side of the pond, the Bank of Canada has embarked on its own easing campaign. In a rather bold move on Wednesday, the central bank slashed its benchmark interest rate by half a percentage point, bringing it down to 3.25%. This manoeuvre, however, has led Canada’s 2-year yield to fall this week as much as 126 basis points below its U.S. counterpart—the largest gap since the not-so-recent past of November 1997.

The Bearish Sentiment

As the Canadian dollar faces these trials, a chorus of pessimists emerges. For many, the loonie’s decline sparks a chase for better returns elsewhere, leading to bearish sentiment. Chandler, once again, has noted this growing bearishness as the currency falters. Indeed, speculators have upped their bearish bets on the Canadian dollar to record levels, as indicated by data from the U.S. Commodity Futures Trading Commission. Trading Commission

The Influence of Oil and Bonds

Furthermore, the price of oil, one of Canada’s major exports, nudged downwards by 0.2% to $70.18 a barrel. This came after forecasts predicted an abundant supply in the market, adding another wrinkle to the Canadian dollar’s challenges. All the while, Canadian bond yields climbed higher across the curve, taking their cues from U.S. Treasuries. The 10-year was observed up by 4.8 basis points at 3.135%.

For now, we shall patiently await the next developments on this financial journey.