Posthaste: Canadian dollar at risk of falling to lows only seen during economic shocks
The Canadian dollar is at risk of falling to lows only seen during big economic shocks as forces once again line up against the currency, economists warn.
The Bank of Canada cut its interest rate by half a percentage point this month, widening the gap between it and the United States Federal Reserve, which puts pressure on the loonie.
The Fed made its own large cut in September, but the resilience of America’s economy since then has led to speculation that it won’t ease as much as expected, said Benjamin Reitzes, Canadian rates and macro strategist with BMO Capital Markets.
The Canadian economy, on the other hand, is showing no signs of momentum, suggesting that more rate cuts are to come.
“The BoC seems ready to do whatever it takes to reflate an economy running below its potential, even leaving the door wide open to another outsized move at the next meeting. On the other end the Fed is unlikely to repeat its 50 bp move of September,” said Scotiabank analysts led by Hugo Ste-Marie in a report.
“Again we have two central banks heading in the same direction: one is walking, the other is running.”
The current 125-basis-point spread between the two policy rates is the widest it’s been in at least two decades, and it could widen in months to come, putting more pressure on the Canadian dollar, said Ste-Marie.
Recent cuts to immigration targets by Ottawa could cool inflation, especially in housing, and slow growth, pushing the Bank of Canada to cut rates even further, said Reitzes.
Then there is the U.S. election. The tariffs promised by Republican candidate Donald Trump and the possibility of friction with Canada’s biggest trading partner would not bode well for the economy or the loonie, he said.
A disorderly election
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