Canadian Dollar Hits Multi-Year Low Over Political Unrest

The Canadian dollar plunged even deeper against the US Greenback Thursday following the Trudeau government’s announcement of a $61.9 billion budget shortfall and the exit of Chrystia Freeland, the deputy prime minister and finance minister.

The Canadian dollar fell to its lowest since March 2020, dropping 0.5 percent on Tuesday to trade past 1.43 per US dollar. It has dropped more than 7 percent against the US dollar this year, putting it on track for its worst performance since 2018.

The Canadian dollar appears to be losing ground due to the potential for a US-Canada trade conflict, significant cuts by the Bank of Canada, a bleak oil price outlook, and current political unrest.

The gap between the U.S. Federal Reserve’s policy rate and the Bank of Canada’s rate has increased to approximately 130 basis points due to the Bank of Canada’s decision to lower its policy rate by 50 basis points last week.

Interest Rates in Canada

Despite the possibility that the Federal Reserve may reduce its rate at its meeting this week, a substantial U.S. premium will continue to exist.

Interest rates in Canada will continue to be significantly lower than those in the United States for the foreseeable future, as they are dependent on policy rates.

This disparity will continue to pressure the value of the Canadian dollar against the U.S. greenback, as investors will continue to favour U.S. dollar-denominated assets with higher earnings over Canadian dollar assets.

If the Bank of Canada responds to Trump’s actions by making additional rate cuts, the loonie could also be further pressured downward by President-elect Trump’s threatened trade actions against Canada.

Contextually, on January 1, 2024, it cost 1.33 Canadian dollars to purchase one U.S. dollar instead of 1.43 Canadian dollars on December 13, 2024. This indicates a considerable decrease in the value of the Canadian dollar of approximately 7.6% during the specified time frame.

Capital Leaving Canada

In summary, it will elevate inflation through increased import prices and increased demand for domestic output and labour. Additionally, it may reduce productivity growth and exacerbate the reduction in living standards.

Investment in this category of physical capital is instrumental in stimulating productivity growth, as Canada imports most of its apparatus and equipment, including information and communications technology, from the United States and other countries.

The increased cost of capital equipment imports is due to the declining Canadian currency, discouraging investment and slowing productivity growth.

It may also protect domestic firms from foreign competition, reducing their motivation to invest in productivity-enhancing assets, even if they price their output in U.S. dollars.

According to foreign exchange analysts, the resignation of a prominent member of Canada’s government has introduced a degree of political uncertainty into financial markets. As evidenced by the recent experiences of the UK and Eurozone, political uncertainty can significantly impact currencies.