Posthaste: Why the Canadian dollar has had a tough week

The Canadian dollar was under pressure on two fronts this week. Photo by Peter J. Thompson /Financial Post

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It’s been a tough week for the Canadian dollar.

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First, United States Federal Reserve chair Jerome Powell on Wednesday showed no inclination to cut interest rates for the foreseeable future, while the Bank of Canada said the door is “open” to paring back their policy rate. Then last night, U.S. President Donald Trump upped the pressure by hiking tariffs on Canadian goods to 35 per cent.

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The increased tariff rate came into effect today on all goods not covered by the Canada-U.S.-Mexico Agreement (CUSMA). Following Trump’s announcement, the loonie fell nearly half a per cent, nearing 72 U.S. cents, but was regaining some of that lost ground in early trading.

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“It (the Canadian dollar) is now recovering territory as traders take a more nuanced view on the longer term economic effects,” Karl Schamotta, chief market strategist at Corpay Inc., said in a note late Thursday, adding that “currency markets are reacting with remarkable aplomb, suggesting that tonight’s actions were largely priced in.”

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Aug. 1 was Trump’s deadline for Canada and the U.S. to reach a trade deal, but the U.S. president signed the executive order Thursday night to slap Canada with the increased duties.

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Meanwhile, a potentially widening interest rate gap between the central banks rates in the U.S. and Canada has clipped the Canadian dollar’s wings.

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“We think Powell’s press conference performance set a very high bar for cutting in September,” analysts at currency specialist MonFX said in a note, adding “that had been the market base case ahead of (Wednesday’s) event.” 

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In the wake of the Fed’s announcement and Powell’s ensuing press conference, markets trimmed their bets for a rate cut in September to only 10 basis points — which means no cut — and to 35 basis points by year-end, meaning one cut is still in the cards for 2025.

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MonFX is among those currency houses that think the Fed is done cutting for the year if the unemployment rate holds and signs of inflation start to percolate.

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With expectations of rate cuts evaporating, “the (U.S. dollar) response was swift, broad and brutal, sending the DXY (U.S. dollar index) to its highest level since late May,” Shaun Osborne, chief FX strategist, and Eric Theoret, FX strategist, at the Bank of Nova Scotia, said in a note.

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The Canadian dollar fell nearly half a U.S. cent on Wednesday after the two central bank announcements. On Thursday, the loonie was one of only two major G10 currencies to post declines against the U.S. dollar. The other was the Japanese yen.