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4w ago

Loonie Drops to 14‑Month Low as U.S. Yield Gap Widens

Falling oil prices together with a larger U.S.-Canada short-term yield gap are stripping market support from the Canadian dollar, threatening domestic borrowing costs and inflation dynamics.

A Canadian dollar coin, commonly known as the "Loonie", is pictured in this illustration picture taken in Toronto January 23, 2015. The Canadian dollar strengthened against the U.S. dollar on Friday after Canadian CPI data showed an increase in core inflation. REUTERS/Mark Blinch (CANADA - Tags: BUSINESS)
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Overview

  • The Canadian dollar fell to its weakest level in 14 months on Friday as the U.S. dollar strengthened after Federal Reserve signals that markets expect higher short-term U.S. interest rates.
  • Canada’s two-year government yield moved further below the U.S. equivalent to about a 137 basis‑point gap, the widest spread since May 2025, making U.S. assets relatively more attractive to investors.
  • Oil prices have dropped back to pre-war levels after an interim deal reopened the Strait of Hormuz and eased Iran sanctions, removing a major export-driven support for the loonie.
  • Speculative bearish bets on the Canadian dollar rose to multi-month highs and technical trading broke past November resistance, increasing the chance that momentum will push USD/CAD into the mid‑1.40s.
  • Weak Canadian data on retail sales and back-to-back quarterly GDP declines have reduced confidence in domestic demand and in prospects for further Bank of Canada rate tightening, which could prolong pressure on the currency.