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Headwinds are mounting for the Canadian dollar with the greenback on a tear and the Bank of Canada looking set to cut rates before the Federal Reserve.
Loonie under pressure as U.S. dollar soars and Bank of Canada looks set to cut rates, says TD
Headwinds are mounting for the Canadian dollar with the greenback on a tear and the Bank of Canada looking set to cut rates before the Federal Reserve.
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“The U.S. dollar is flying high,” said TD Economics.
Unlike other economies, the United States has largely resisted the gravitational pull of higher interest rates, staying on stronger footing than its peers.
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With the Fed in no hurry to cut rates while other countries near the finish line, the U.S. dollar has surged in the past four months.
“With markets punting out Fed cuts but not doing the same for other countries, the U.S. dollar’s strength has no challenger until a pivot occurs in economic dynamics between countries or a geopolitical shift takes hold,” wrote Toronto Dominion Bank chief economist Beata Caranci and senior economist James Orlando in a recent report.
The greenback’s ascent has left other currencies swirling in its wake. The pound, euro and Canadian dollar are all down between four and five per cent in the past nine months, they said.
So how far could the Canadian dollar fall?
Since the summer of 2022, when the Fed caught up to the Bank of Canada’s rate hikes, the loonie has been stuck between 72 and 76 US cents, said Caranci and Orlando.
Canada’s economy also began to decline around this time. If not for the boost to demand from rapid population growth, the country would likely be in recession now, they said.
There are also signs of weakness in the labour market, with growth in the number of unemployed workers up 23 per cent over the past year, a level consistent with recession.
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If the economy and inflation continue to slow, Bank of Canada is expected to cut its rate this summer, which would put further pressure on the loonie.
“The Canadian dollar is caught in the crosshairs. The Bank of Canada does not manage monetary policy with an eye on the loonie, but spreading interest rates too wide to its U.S. counterpart could cause a break below the resistance level of 72 U.S. cents,” wrote the economists.
Caranci and Orlando don’t think bank governor Tiff Macklem and his deputies will want to get too far ahead of the Fed and risk undermining the loonie, but there are other threats.
If geopolitical conflicts escalate, pushing up oil prices and tilting markets away from risk, the Canadian dollar would take a hit.
Once higher oil prices would have boosted the loonie, but those days are gone. A surge in risk-off sentiment would outweigh the oil gains and potentially tip the loonie to 70 cents or lower, said the economists.
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Today’s Posthaste was written by Pamela Heaven with additional reporting from Financial Post staff, The Canadian Press and Bloomberg.
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