Canadian Dollar Hits Two-Month Low Amid Trade Tensions and Policy Gaps
So, there’s been quite a bit of buzz lately around the Canadian dollar, and it’s not exactly great news. The loonie has just dropped to its lowest level in two months, and a few factors are coming together to explain why that’s happening.
Right now, the main driver is growing uncertainty around a potential trade deal with the United States. Hopes for a breakthrough are starting to fade, especially with U.S. President Donald Trump hardening his stance. He’s even hinted that it’ll be “very hard” to reach an agreement with Canada—especially after Canada publicly supported Palestinian statehood, something that has ruffled feathers in Washington. And let’s not forget that roughly 75% of Canada’s exports go to the U.S., so anything that threatens trade relations hits the Canadian economy hard.
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At the same time, monetary policy divergence is adding more weight to the loonie’s struggles. The Bank of Canada has started hinting at a possible interest rate cut in the near future. Meanwhile, over in the U.S., Fed Chair Jerome Powell has poured cold water on expectations that American interest rates might be lowered anytime soon. This growing gap in rate expectations between the two countries is pushing investors to favor the U.S. dollar over the Canadian one.
In fact, the Canadian two-year bond yield is now sitting about 117 basis points below its U.S. counterpart. That’s the widest gap seen in about three weeks. Traders are watching this closely and many, like Corpay’s Chief Market Strategist Karl Schamotta, still expect the Canadian dollar to potentially weaken further, possibly testing the 1.39 mark against the U.S. dollar.
And it’s not just about policy and politics—economic data at home isn’t offering much support either. Canada’s GDP shrank slightly in May, down 0.1% on the month, mainly due to a pullback in retail activity. While early data suggests the economy may have bounced back a bit in June, the overall pace of growth remains sluggish—just 0.1% for the second quarter on an annualized basis.
Oil prices, which are a big deal for Canada as a major exporter, also slipped 1.1%, settling just above $69 a barrel. And to top it off, Canadian bond yields have been sliding across the board, with the 10-year yield dropping to its lowest point since mid-July.
So, to sum it all up: with U.S. trade tensions heating up, diverging interest rate expectations, soft economic data, and lower oil prices all coming into play, the Canadian dollar has found itself on shaky ground. And unless some of these trends reverse soon, the loonie could stay under pressure for a while.
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