Loonie Slips as Trade Uncertainty Weighs on Outlook
The Canadian dollar dropped to a two-month low on Thursday, amid growing concerns over a stalled U.S.-Canada trade deal and diverging interest rate paths between the two countries. The loonie slid 0.1% to trade at 1.3845 against the U.S. dollar, or 72.23 U.S. cents, reaching its weakest level since May 29.
Currency strategists point to a widening policy gap between the Bank of Canada and the U.S. Federal Reserve. Karl Schamotta, Chief Market Strategist at Corpay, noted that “policy rate expectations are diverging,” adding that the loonie remains vulnerable in the short term.
Interest Rate Gap Widens
After the Bank of Canada hinted at a possible rate cut, Canadian bond yields slipped sharply. The two-year yield is now 117 basis points below its U.S. equivalent—its widest margin in three weeks. At the same time, remarks from Fed Chair Jerome Powell have weakened expectations for a rate cut in the U.S. this September.
The 10-year Canadian bond yield also fell 4.1 basis points, settling at 3.448%, its lowest level since July 11. As investors seek clarity, the loonie continues to feel pressure.
Tariff Deadline and Political Tensions
Tensions are escalating as President Trump’s August 1 tariff deadline looms. Trump suggested a deal with Canada would now be “very hard” following Canada’s recent support for Palestinian statehood. The political rift is adding further strain on trade negotiations, and traders are responding with caution.
With nearly 75% of Canadian exports heading to the U.S., any disruption in the trade relationship could have significant consequences. Canada’s economy is already under stress—GDP shrank by 0.1% in May, largely due to a slowdown in retail.
Signs of a Fragile Recovery
While May’s contraction matched expectations, early data indicates the economy may have regained some ground in June. Preliminary estimates point to annualized growth of 0.1% for Q2. Still, it’s a modest recovery, not strong enough to shift market sentiment just yet.
Adding to the economic headwinds, oil—one of Canada’s key exports—settled 1.1% lower at US$69.26 per barrel. Lower commodity prices further limit support for the loonie.
Market Outlook Remains Cautious
With a mix of geopolitical tension, economic sluggishness, and monetary policy divergence, the Canadian dollar faces an uphill climb. Analysts are keeping an eye on the 1.39 level as a possible next stop.
Stay tuned to Maple Wire for real-time updates and expert analysis.
