Investors ramp up bearish positions on the Canadian dollar amid tariff concerns and policy shifts
Bearish sentiment toward the Canadian dollar is intensifying as investors brace for a potential Bank of Canada rate cut and ongoing trade uncertainty with the United States.
According to Reuters, the loonie fell to its lowest levels since August, trading at $1.3845 per US dollar, or 72.23 US cents, on Tuesday, and weakening further to $1.3860 per US dollar, or 72.15 US cents, on Wednesday.
This decline comes as market participants increasingly expect the Bank of Canada to resume its easing cycle next week. Investors are pricing in a roughly 90 percent chance of a rate cut following recent employment data.
The data highlighted the impact of tariff-related uncertainty on the domestic economy, as reported by Reuters.
“This weakness is partially attributable to an increase in net-short institutional positioning,” said Kevin Ford, FX & macro strategist at Convera, as quoted by Reuters.
Ford also noted that, while Canada benefits from the CUSMA deal and has one of the lowest effective tariff rates globally, “tariffs on other sectors and ongoing uncertainty about a new trade deal with the US continue to dampen the medium-term economic outlook.”
Canadian employment data released on Friday added to evidence that uncertainty related to US tariffs is taking a toll on the domestic economy, as per Reuters.
The Canada-United States-Mexico Agreement (CUSMA) currently allows most Canadian exports to enter the US tariff-free, but the agreement is up for review in July next year, contributing to the cautious outlook.
Expectations for a US Federal Reserve rate cut next week have also influenced sentiment, with Reuters noting that US producer prices unexpectedly fell in August.
“If the US is in a position where it's having to cut interest rates it's very rare for Canada to just be sitting on the sidelines,” said Amo Sahota, director at Klarity FX in San Francisco, as cited by Reuters.
Despite higher oil prices—settling 0.6 percent higher at US$62.60 a barrel on Tuesday and 1.7 percent higher at US$63.67 a barrel on Wednesday, following geopolitical developments—these gains have not been sufficient to offset the loonie’s decline.
Canadian bond yields have also reflected the shifting landscape, with the 10-year yield rising to 3.225 percent on Tuesday before falling to 3.174 percent on Wednesday.
