On December 18, 2024, due to domestic political turmoil and the widening gap in bond yields between Canada and the United States, the Canadian dollar fell to its lowest level in nearly five years against the US dollar on Tuesday, December 17, reaching the lowest level since March 2020.
The Canadian dollar continued its recent downward trend on Tuesday, dropping another 0.4% against the US dollar, with 1 USD exchanged for 1.4323 Canadian dollars, marking the lowest level since the onset of the pandemic lockdowns.
According to a report by Reuters, Benjamin Reitzes, the Canadian rates and macro strategist at BMO Capital Markets, stated, “Sentiment towards the Canadian economy and macro backdrop remains quite negative. Coupled with political unrest, the outlook for the Canadian dollar is not optimistic at the moment.”
On Monday, Canadian Finance Minister and Deputy Prime Minister Chrystia Freeland abruptly resigned, putting the Liberal government in a difficult situation, while US President-elect Trump is set to take office soon, having previously mentioned the possibility of imposing a 25% tariff on Canada.
Bloomberg reported that Skylar Montgomery Koning, an FX strategist at Barclays, expressed that the latest political unrest indicates greater troubles for the Canadian dollar. Apart from its weaker economic performance compared to the US, Canada now faces the threat of US tariffs.
“We foresee continued pressure on the Canadian dollar,” he said.
The Canadian dollar continues to face pressure as the Bank of Canada has lowered borrowing costs, causing market expectations for a widening interest rate differential with the United States. Earlier on Tuesday, the inflation rate fell below the Bank of Canada’s target for the second time in three months, providing evidence for a significant interest rate cut by policymakers.
So far this year, the Canadian dollar has depreciated by over 7% against the US dollar, potentially marking the worst year since 2018.