The Canadian dollar fell to its lowest level in nearly two years on Friday as investors around the world weighed the worsening outlook for the economy and rushed to the safety of the US dollar.
The Canadian dollar changed hands for as little as 75.15 US cents at one point on Friday morning. This is the currency’s lowest level since October 2020.
The loonie was down about half a cent from Thursday’s close, just the latest day of a stretch for Canada’s currency. The wolf fell more than a penny on Tuesday as US data showed the country’s core inflation rate is still heading in the wrong direction: up.
It’s not often that one country’s currency sinks because of economic data coming out of another, but that’s not the case right now because of the big problem that is inflation.
Stubbornly high inflation in the US increases the odds that the country’s central bank will have to raise its interest rate even more aggressively than it has been. The US Federal Reserve is expected to do so next week, raising its benchmark rate by at least 75 basis points to 3.25 percent, if not more.
The prices of investments linked to the Fed rate suggest that investors think the US bank rate will go as high as four or even five percent.
“Rates will peak higher than assumed a few months ago and hold longer than initially expected,” said Audrey Childe-Freeman, currency strategist at Bloomberg Intelligence. “At some point the market will focus on the next Fed cycle [of rate cuts] but that’s a long way off.”
If the Fed rate rises to 4.5 next year, as investors expect, it is much higher than the Bank of Canada is likely to go, which is why the gap between the two countries’ currencies has widened. is expanding
How rate hikes affect a currency
Other things being equal, rate hikes increase the value of a country’s currency because it’s worthwhile for foreign investors to park their money there: they’ll get a higher return for doing so. This rule of thumb is even more applicable than usual right now, because the US dollar is considered the safest place to keep your money in times of uncertainty.
“There’s been an absolute flood of money into the US dollar because it’s the preeminent safe haven and because the US economy is so much stronger than anywhere else,” says Adam Button, chief currency analyst at the ForexLive forex firm.
The loonie appears to be taking a swan dive because almost everything that isn’t the US dollar is getting bullish right now, he says. Compared to other currencies such as the euro, the British pound and the Japanese yen, the Canadian dollar has gained ground this year. But it’s falling by the yardstick most Canadians measure it by: the US dollar.
Another reason for the relative weakness of the wolf is the softness in commodity prices such as oil and gold, as the outlook for the global economy worsens.
“Commodities are weak, largely because the market is (finally) coming to grips with the fact that the outlook for global demand looks bleak,” said Bipan Rai, currency analyst at CIBC. “This matters for a key proxy like the Canadian dollar.”
The price of a barrel of oil has lost about $30 since June, which under normal circumstances would be more than enough on its own to drag the wolf down.
But that selling pressure is being made worse by what investors think central banks will do. While Canada’s central bank is also raising rates aggressively, pain in the country’s housing market and consumer spending will likely force the central bank to stop hiking soon.
“Until the last week, the market was saying both would stop around four percent,” Button said. “Now the market is saying the Fed may hike, but the Bank of Canada may not.”
If that happens, that’s a recipe for even more money pouring into the US dollar, which is why Button wouldn’t be surprised to see the wolf dip below 73 cents by the end of the year.
“Canadians may not fully appreciate how bad things are,” he said.