Canadian dollar hits four-year low as 71 cent U.S. threshold nears

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The Canadian dollar fell to a four-year low Wednesday with analysts keeping a sharp eye on the currency as it approached the critical barrier of 71 cents U.S.

“If you look at the (Canadian dollar) chart over the past five years, we haven’t breached that level since the pandemic,” Sarah Ying, head of foreign exchange strategy at CIBC Capital Markets, said.
The loonie is down 1.1 per cent since Donald Trump was elected U.S. president last week as investors worry that Trump’s plans for tariffs will have negative consequences for the Canadian economy.

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Wednesday, it traded as low as 71.4 cent U.S., before rebounding to slightly to 71.5 cent U.S. in midday trading.

“The Canadian dollar looks poised on the edge of breaking through post-pandemic lows to the downside,” Karl Schamotta, chief market strategist at Corpay Currency Research, said in a note this morning.

Ying thinks that even if the loonie falls below the 71 cents U.S. mark, market participants will support the Canadian dollar “for a longer period of time” before it makes another significant move.

Still, Ying also noted a larger than expected drop in the currency on Wednesday morning can be attributed to the “Trump trade” which has boosted the U.S. dollar and interest rate divergence.

Interest rate policy divergence is a re-emerging threat for the Canadian dollar, with the spread between the lending rates of the United States Federal Reserve and Bank of Canada now expected to widen more than previously anticipated, pushing down the value of loonie against the greenback.

Schamotta said in the note that a burst of U.S. inflation could push the Canadian dollar below the 71 cents U.S. mark — “a move that could clear the way for a two-to-three per cent drop.”

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U.S. inflation data for October released Wednesday showed that the core consumer price index — the Federal Reserve’s preferred gauge of inflation, remained firm for the month, coming in at 3.3 per cent year over year, although bets rose for a standard 25 basis point rate cut rose following the release, Ying noted.

Persistent inflation could keep the Fed from cutting more than markets expected. Meanwhile, many economists continue to call for the Bank of Canada to produce another 50 basis point cut to its benchmark interest rate to try and boost a slumping economy and slowing jobs market.

Despite the Canadian dollar’s woes since the Nov. 5 election, Schamotta at Corpay said that it is nonetheless performing better than other major currencies over that time period.

For example, the euro is down 3.3 per cent and the British pound is down 2.5 per cent. The yen, meanwhile, has fallen 2.4 per cent.

“This may reflect subtleties in the trade relationship,” Schamotta said, noting that Canada’s “biggest exports — autos and energy — seem likely to receive tariff exemptions, and the country often runs a net deficit.”

He said traders might also be visualizing a world where a stronger U.S. economy rubs off on Canada due to close tie.

“If the U.S. gets stronger, Canada could see some corollary benefits,” he said.

• Email: gmvsuhanic@postmedia.com

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