CAD falls to 2-week low due to rate hikes impact.
CAD falls to 2-week low due to rate hikes impact.
Canadian Dollar Edges Lower as Economy Contracts in June
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TORONTO, JULY 28 – The Canadian dollar edged lower against its U.S. counterpart on Friday after preliminary data showed the domestic economy contracting in June, a possible sign that higher borrowing costs are working to slow activity.
The Canadian dollar, also known as the loonie, traded 0.1% lower at 1.3240 to the greenback, or 75.53 U.S. cents, after touching its weakest intraday level since July 11 at 1.3249. This decline in value represents the potential impact of higher interest rates on the Canadian economy.
According to recent data, Canada’s economy grew 0.3% in May but is likely to have contracted 0.2% in June. This signals a potential slowdown in economic activity and could bring an end to the Bank of Canada’s monetary tightening campaign, which has pushed interest rates to a 22-year high.
Karl Schamotta, chief market strategist at Corpay, commented on the data, saying that “underlying momentum is weakening as higher borrowing costs begin to bite.” This suggests that the impact of increasing interest rates is starting to take effect on the Canadian economy.
In contrast, separate data from the United States showed that annual inflation rose at its slowest pace in over two years in June, with underlying price pressures receding. This trend could potentially push the Federal Reserve closer to ending its aggressive interest rate hiking cycle since the 1980s.
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These contrasting trends between Canada and the United States have sparked hopes of a soft landing for the U.S. economy, which has had a positive impact on Wall Street and the price of oil. As one of Canada’s major exports, the increase in oil prices has supported the Canadian economy despite the contraction in other sectors. U.S. crude oil futures settled 0.6% higher at $80.58 a barrel.
As a result of these economic dynamics, Canadian government bond yields have fallen across the curve. The 10-year bond yield was down 8.1 basis points at 3.536%, while the spread with the U.S. equivalent has further widened to 43.6 basis points.
In conclusion, the Canadian economy’s contraction in June, along with the potential end to the Bank of Canada’s tightening campaign, has put downward pressure on the Canadian dollar. However, the positive trends in the U.S. economy, particularly the slowdown in inflation and hopes of a soft landing, have supported oil prices and mitigated the impact on Canada’s major exports. As the economic landscape continues to evolve, it remains to be seen how these factors will shape the future of the Canadian dollar.
