TORONTO — The Canadian dollar is trading against the U.S. dollar at levels not seen since 2020 as the combined pressures of economic outlooks, elections, and energy prices weigh. Here’s what you need to know.
What’s happening with the Canadian dollar?
Canada’s currency sunk below 72 cents US this week for the first time in more than four years, breaking through the 72 to 76 cent band it has been trading within in recent months.
It closed Tuesday at 71.89 cents US after falling just under 72 cents on Monday. As of midday Wednesday it had inched a little lower, to 71.85 according to XE.com.
The lower loonie should help industries like tourism because it can encourage more Americans to travel north to get more bang for their buck, but for anyone travelling to the U.S., or buying things in U.S. dollars, it means paying more.
What’s driving down the currency?
The biggest driver of the split between the Canadian and U.S. dollar is the diverging economic outlooks, and the interest rate decisions linked to those. That’s because the higher the central bank interest rate, the more worthwhile it is to hold that country’s currency.
Canadian economic growth is looking weaker than the U.S., leading the Bank of Canada to cut its key interest rate by an unusually high half a percentage point to 3.75 per cent last week. It was the fourth consecutive cut by the central bank and economists expect continued cuts ahead. With the U.S. economy seeing stronger growth, there’s less pressure and expectations of the path to lower rates from the U.S. Federal Reserve.
“The U.S. economy feels a lot more resilient. So the assumption is that they’re not pressured, the Fed isn’t pressured to reduce rates as much as it is in Canada,” said Rahim Madhavji, president at Knightsbridge Foreign Exchange Inc.
Crude prices have fallen recently, down below US$70 a barrel, to also weigh on the loonie.
There’s also an increasing election trade betting on a Trump win that’s also putting pressure on the Canadian dollar, he said. The potential for trade wars and downward oil price pressure if he does win is also helping boost the U.S. dollar.
“The outlook in the near term is definitely grim for the Canadian dollar,” said Madhavji.
What’s the outlook?
Scotiabank analyst Hugo Ste-Marie said in a recent note that he’s been bearish for some time on the loonie. The director of portfolio and quantitative strategy says the Canadian dollar could re-test the lows of the past two decades, such as 2020 and 2016 when the loonie neared 68 cents US, if it pushes below the 72 cent threshold, which it now has. Ste-Marie said the expectation is the Canadian dollar will bounce back next year, but that the level that it’s expected to recover to keeps inching down as well.