Canadian dollar falls to March 2020 levels as inflation slows and finance minister resigns
The Canadian dollar dropped to its lowest level since March 2020 as political instability and economic underperformance weighed on the currency.
According to BNN Bloomberg, the loonie slid another 0.5 percent on Tuesday, trading past 1.43 per US dollar, extending its recent declines.
The resignation of Finance Minister Chrystia Freeland intensified the political crisis.
Freeland, who had served as finance minister since 2020, stepped down on Monday, opposing Prime Minister Justin Trudeau’s focus on short-term spending and voter-targeted tax breaks that would widen the budget deficit.
Freeland previously led a cabinet group tasked with developing strategies to address US policies under President-elect Donald Trump.
Trump has threatened 25 percent tariffs on Canadian goods, a scenario Deutsche Bank strategist Michael Puempel said is now more likely given Canada’s current political turmoil.
“Simply put, unless there is more stability in Canadian political leadership, we believe Trump is likely to maintain his maximalist approach to trade with one of the US’s largest trading partners,” Puempel wrote in a note to clients.
He anticipates an early Canadian election in the first quarter of 2025 and expects tighter fiscal policy to follow.
The Canadian dollar has faced continued downward pressure this year, driven by economic struggles and widening interest rate gaps between Canada and the US.
The Bank of Canada’s rate cuts have reduced borrowing costs, leading markets to anticipate further divergence from US rates.
On Tuesday, inflation fell below the Bank of Canada’s target for the second time in three months, validating the central bank’s aggressive monetary policy moves. However, the weakening economy is compounding concerns for the loonie.
Jim Caron, chief investment officer at Morgan Stanley Investment Management, described the situation as precarious.
“The Canadian economy is skating on thin ice at this point and it’s getting worse with the political turmoil there,” Caron said. He added that the combination of economic struggles and the Canada-US interest rate gap is dragging down the currency.
Implied volatility for the Canadian dollar surged on Tuesday, reaching its highest level in over a year. Analysts expect further weakness.
Brad Bechtel, global head of FX at Jefferies, warned that “holiday liquidity” could push the loonie to 1.4668 per US dollar in the coming weeks, a level last seen on March 19, 2020.
The Canadian dollar has fallen over 7 percent against the US dollar this year, positioning it for its worst annual performance since 2018.
Hedge funds increased bets against the loonie in the week ending December 10, according to data from the Commodity Futures Trading Commission.
Analysts highlighted the political and economic pressures as broader issues affecting the Canadian dollar.
“[The latest political turmoil] is symptomatic of the greater troubles facing the currency with the economy underperforming the US — and now facing the threat of tariffs,” said Skylar Montgomery Koning, foreign-exchange strategist at Barclays.
Kit Juckes, head of currency strategy at Societe Generale, described the loonie’s struggles as ongoing. “[The Canadian dollar] is suffering devaluation by a thousand cuts,” Juckes wrote, pointing to the lack of rate support, trade uncertainty, and political instability.
The loonie’s decline reflects a combination of external and domestic challenges, with analysts anticipating further volatility as Canada navigates political uncertainty and economic headwinds.
