The Canadian dollar's recent weakness can be attributed to shifts in global economic sentiment and specific investment flows, primarily driven by dynamics in the United States.
Key Factors Contributing to CAD Weakness
Several factors have recently pressured the Canadian dollar (CAD), leading to its weaker performance against other currencies, particularly the US dollar (USD). According to recent analysis, the Canadian dollar was significantly impacted by changes in expectations regarding US monetary policy and investor reactions to potential political outcomes.
Here are the primary reasons cited for the CAD's weakness:
- Revised Outlooks for Fed Rate Cuts: Changes in how investors and analysts view the likelihood and timing of interest rate cuts by the U.S. Federal Reserve (Fed) played a major role. When expectations for Fed rate cuts are reduced, it generally makes the US dollar and US assets more attractive relative to those in countries where rate cuts might be anticipated sooner or are less likely. This shift in outlook put pressure on the CAD.
- Surge in US 10-Year Yields: A significant increase in the yields of US 10-year Treasury bonds makes holding US debt more appealing to global investors seeking higher returns. This increased demand for US dollar-denominated assets naturally leads to stronger demand for the US dollar itself, causing it to strengthen against currencies like the CAD.
- "Just-in-Case-Trump-Wins" Trades: This refers to specific investment strategies driven by the anticipation of potential political or economic shifts should Donald Trump win a future US election. Such trades often involve moving capital into perceived safe havens like the US dollar, anticipating potential changes in trade policy, geopolitical stability, or economic direction that might favour the USD or increase volatility elsewhere.
- Broad US Dollar Demand: The US dollar was in high demand across various currency pairs. This widespread strength of the USD inherently contributes to the weakening of other currencies, including the Canadian dollar, when measured against it.
These combined factors led to the Canadian dollar weakening steadily through October, as investors favoured the US dollar for its perceived safety and potential for better returns based on evolving economic forecasts and political considerations.
