FX.co ★ Canadian Dollar Weakens Further

The Canadian dollar has weakened to over 1.36 against the US dollar, stepping back from the sixteen-month highs it previously reached. This decline is attributed to a combination of weaker domestic economic growth, decreasing oil prices, and a revived strengthening of the US dollar. The momentum within the Canadian economy has diminished, as evidenced by flat GDP growth in November and a contraction in goods-producing sectors for the third time in four months, particularly driven by ongoing challenges in manufacturing. This situation highlights ongoing excessive supply and muted inflation pressures, reinforcing the belief that the Bank of Canada can afford to be patient rather than adopt a more restrictive monetary policy stance. This is particularly relevant as labor market slack continues to expand. Concurrently, external support has waned with oil prices dropping into the lower $60s per barrel, driven by reduced geopolitical risk related to US-Iran negotiations, thus weakening Canada’s terms of trade. These factors are compounded by a strengthening US dollar, following Kevin Warsh’s nomination as the Federal Reserve chair, which has increased demand for USD liquidity.