Canadian Dollar Plummets to Lowest Level Since 2020 Amid Political Turmoil
The Canadian dollar has hit rock bottom, plummeting to its lowest level since March 2020 as the country’s government teeters on the brink of crisis. This dramatic decline comes on the heels of the shocking resignation of Finance Minister Chrystia Freeland, leaving investors reeling.
Economic Woes Weigh Heavily
Canada’s economy has been struggling to keep pace with its southern neighbor, and the recent political upheaval has only added fuel to the fire. The loonie has been on a downward spiral, losing 0.5% of its value on Tuesday alone, with the exchange rate now hovering around 1.43 per US dollar.
Tariff Threats Loom Large
The threat of tariffs from President-elect Donald Trump has cast a long shadow over the Canadian economy. With Trump’s victory, Freeland was tasked with developing a strategy to respond to US policies, but her resignation has left a power vacuum. Deutsche Bank strategist Michael Puempel believes that Trump is more likely to impose tariffs of 25% on Canada, given the current political instability.
Interest Rate Gap Widens
The Bank of Canada’s decision to lower borrowing costs has only exacerbated the pressure on the loonie. As the interest rate gap with the US widens, investors are becoming increasingly wary of the Canadian currency. Morgan Stanley Investment Management’s Jim Caron notes that the Canadian economy is “skating on thin ice” and that the political turmoil is only adding to the pressure.
Implied Volatility Spikes
The political risks have sent implied volatility on the Canadian dollar soaring to its highest level in over a year. With “holiday liquidity” driving market sentiment, some analysts predict that the loonie could weaken even further, potentially reaching 1.4668 per US dollar in the coming weeks.
Hedge Funds Bet Against the Loonie
Hedge funds have been quick to capitalize on the loonie’s decline, boosting their bets against the currency in the week ending December 10. Societe Generale’s Kit Juckes notes that the Canadian dollar is “suffering devaluation by a thousand cuts,” citing the Bank of Canada’s removal of rate support, tariff uncertainty, and government instability.
A Perfect Storm
The combination of economic woes, tariff threats, and political turmoil has created a perfect storm for the Canadian dollar. As the loonie continues its downward trajectory, investors are bracing for a potentially rocky road ahead.
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