As of October 31, 2024, the Canadian dollar, commonly referred to as the loonie, has fallen to a 12-week low against the US dollar, closing at 71.86 cents US. This decline follows aggressive rate cuts by the Bank of Canada, which has reduced its key interest rate to 3.75% for the fourth consecutive time on October 24, 2024. The loonie dropped significantly from US$0.74 (C$1.3577) to US$0.72 (C$1.3872) after a half-point cut, raising concerns among analysts about the currency's future trajectory. [32e0347d]
The loonie's depreciation is attributed to a combination of weaker Canadian economic growth compared to the U.S. and falling crude oil prices, which have dipped below US$70 per barrel. Experts warn that if further cuts are anticipated, including a potential December cut, the loonie's decline may persist. Scotiabank's Hugo Ste-Marie has expressed a bearish outlook, suggesting that the current trends may continue. [32e0347d]
Despite the recent downturn, there are both positive and negative implications for Canadians. A weaker loonie can benefit tourism and exports by making Canadian goods more competitive abroad. However, it also increases costs for Canadians traveling internationally and raises prices for imported goods. The current interest rate spread between Canada and the U.S. is 100 basis points, which could widen if the Federal Reserve decides to cut rates. [32e0347d]
In the broader economic context, the Canadian economy is facing challenges, including the highest household debt in the G7, which stands at 184% of net disposable income. Inflation expectations remain low, with the Consumer Price Index (CPI) at 1.6%. Analysts are concerned that a dovish stance from the Bank of Canada compared to the U.S. Federal Reserve could exacerbate the loonie's weakness, especially if a recession occurs. [32e0347d]
Looking ahead, Canadian assets could benefit if the economy achieves a 'soft landing.' However, the interplay between U.S. fiscal and trade policies, particularly in light of the upcoming elections, will be crucial for future currency stability. As Canada sends approximately 75% of its exports to the United States, the loonie's performance will remain closely tied to developments in the U.S. economy. [32e0347d]