The Canadian dollar has weakened, approaching C$1.41 against the US dollar, marking a near seven-month low. This decline is attributed to the strengthening of the US dollar in combination with ongoing trade uncertainties and a rising deficit amid sluggish economic growth. The stronger US dollar has diminished the appeal of holding the Canadian dollar, especially after the Bank of Canada reduced its policy rate to 2.25%. This policy adjustment has lowered domestic nominal yields, even though officials have suggested that the rate-cutting cycle may be concluding. Consequently, market attention has shifted to the slowing economic activity rather than potential further policy easing.
The latest budget from Ottawa is set to more than double the deficit to approximately C$78.3 billion this year, resulting in substantial fiscal expansion that markets need to price in alongside the existing tepid growth. Furthermore, the potential support for the Canadian dollar from oil is limited, as prices have stabilized in the low to mid-sixties per barrel. This stabilization weakens Canada's terms of trade and reduces export revenue that might have otherwise bolstered the currency. In addition, renewed trade tensions with the United States have heightened both policy and growth risks.
