Canadian Dollar Drops to Lowest Point in 4.5 Years Amid Yield Spread Pressure

Canadian Dollar Hits 4.5-Year Low as Yield Gap and Broad Dollar Strength Weigh

The Canadian dollar fell to a 4.5-year low against its U.S. counterpart on Thursday, pressured by a strengthening U.S. dollar and a widening gap between U.S. and Canadian bond yields.

The loonie was trading 0.2% lower at 1.4190 per U.S. dollar, or 70.47 U.S. cents, after hitting its weakest point since April 2020 at 1.4199.

“The Canadian dollar’s weakness is partly a function of the broad U.S. dollar strength,” said Marc Chandler, chief market strategist at Bannockburn Global Forex LLC. “I have also noticed that there is a stronger relationship, it’s more sensitive, to the U.S.-Canadian 2-year interest rate differential.”

The U.S. dollar strengthened for a fifth consecutive session, buoyed by hotter-than-expected U.S. inflation data and the European Central Bank’s decision to cut interest rates for the fourth time this year.

Meanwhile, the Bank of Canada has pursued an even more aggressive easing strategy. On Wednesday, it slashed its benchmark interest rate by half a percentage point to 3.25%.

This policy divergence has contributed to Canada’s 2-year yield falling as much as 126 basis points below its U.S. equivalent, marking the largest gap since November 1997.

“As the Canadian dollar weakens, investors chase higher returns elsewhere, amplifying bearish sentiment toward the loonie,” Chandler added.

Bearish bets on the Canadian dollar have reached historically high levels, according to data from the U.S. Commodity Futures Trading Commission.

Adding to the loonie’s pressure, oil prices—a key Canadian export—dipped 0.2% to $70.18 per barrel amid forecasts for ample supply.

Canadian bond yields moved higher in tandem with U.S. Treasuries, with the 10-year yield climbing 4.8 basis points to 3.135%.