The Canadian dollar performed well in the months following the coronavirus-fuelled stock market crash, rising approximately 22% to $0.8329 U.S. The Canadian loonie barrelled higher on stronger commodity prices and optimism around the roll-out of the COVID-19 vaccine. Fast forward a year and it’s a different story altogether, with the Canadian dollar falling to its lowest point in two years.
On Friday, September 16 the Canadian dollar traded for $0.7515 U.S., a nearly two year low. The loonie took a beating as investors and analysts weighed the chances of a global recession and ran to the safety of the U.S. dollar.
Why Is the Canadian Dollar Falling?
Economic data coming out of both Canada and the U.S. suggest a recession is all but unavoidable. The Bank of Canada has been aggressively hiking its key lending rate in an effort to combat runaway inflation. The central bank has raised its key rate by 300 basis points since March to 3.25%.
More rate hikes are expected, which will further weigh on the overall economy and housing market. A slowing of economic activity in Canada will likely push the economy into a recession in early 2023.
Because the U.S. is our biggest trading partner, a recession in the U.S. would also have a big impact on our economy. With U.S. inflation above eight percent, the U.S. Federal Reserve has been raising its key lending rate at a torrid pace too. The Fed is expected to raise its federal funds rate by another 75 basis points when it meets next to between 3.0% to 3.25% and eventually lift its policy rate above four percent. If the Federal Reserve raises it above four percent analysts believe the loonie could dip below $0.73 by the end of the year.
Meanwhile, the World Bank reported recently that the global economy is racing toward a recession as central banks around the world raise their lending rates “with a degree of synchronicity not seen over the past five decades.”
To tackle inflation and bring prices down, central banks are hiking their lending rates, which makes it more expensive to borrow. This also makes loans more costly, which can slow economic growth and tip economies into recessions.
The World Bank said the global economy is contracting at its steepest rate following a pos-recession recovery since 1970. It noted that three of the world’s biggest economies, the U.S., China, and euro area, have been slowing at a dramatic pace.
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The Canadian dollar started out 2022 on a bullish note, juiced higher by strong commodity prices, solid job gains, and unemployment rate below pre-pandemic levels. But today, soaring inflation, rising interest rates, and fears of a global recession are putting pressure on the loonie. A recession could lower prices if Canadians choose to spend less, which would also put a dent in corporate earnings.
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