Posthaste: Why the Canadian dollar is going up when the economy is going down
A funny thing has been happening to the Canadian dollar lately.
Despite evidence that the economy is weakening, the currency has been going up, not down, rising 3 per cent against the U.S. dollar since President Donald Trump's Liberation Day.
That's not usually how it works, but some strategists think this is more than just a temporary overshoot.
Desjardins Group expects the divergence will continue to widen in coming months, with the loonie rising to 74 cents U.S. by the end of this year and to almost 77 cents U.S. by the end of the next. It was trading up at 73.08 this morning.
The forecast is based on the U.S. dollar losing strength rather than the Canadian dollar gaining it, said Mirza Shaheryar Baig, a foreign exchange strategist with Desjardins. The loonie's performance against other major currencies has not been stellar.
'Net-net, a strong loonie is the result of a shift in global capital flows leading to a broadly weaker U.S. dollar,' he said.
Since Liberation Day the U.S. dollar has become positively correlated with stocks.
'In other words, it has lost its safe haven appeal. This matters because many Canadian institutional investors who did not hedge the currency risk on their U.S. investments are now being forced to raise their hedge ratios,' said Shaheryar Baig.
The outlook for the U.S. economy is also weakening. Coming out of the pandemic, it grew faster than other economies, but that has changed. Expectations for U.S. growth have dropped and are now in line with other advanced economies, he said.
The Organisation for Economic Co-operation and Development warned last week that Trump's tariff war will sap global growth in 2025 and it gave the United States the biggest downgrade among G7 nations. The OECD sees its growth slowing sharply from 2.8 per cent in 2024 to 1.6 per cent this year, and 1.5 per cent next.
Trump's tactics to raise the income share of American workers is also unnerving investors, said Shaheryar Baig. Telling Walmart Inc. 'to eat the tariffs' and threatening Apple Inc. with duties on products made out of the country does not help boost the profits investors are looking for.
'To many investors, American capitalism now resembles Chinese 'common prosperity,'' he said.
Desjardins admits its forecast has risks. America dodged a widely expected recession in 2023 and its economy could surprise again. Carry trade in the U.S. dollar, which has the highest deposit yields in the G7, could also revive, he said.
The downside of a strong Canadian dollar against the greenback is that it makes exports more expensive, a drag on Canada's already fragile economy.
Desjardins believes this will force the Bank of Canada to cut its interest rate another 75 basis points to 2 per cent this year.
to get Posthaste delivered straight to your inbox.Canada's manufacturing sector has been slammed by tariffs, but now new data shows that services, which makes up a much bigger share of the economy, are suffering too.
S&P Global's Services PMI for May shows this sector is not only in contraction, but is also the weakest of all 14 countries covered, said National Bank of Canada economists.
Earlier last week S&P Global's manufacturing PMI put Canada as the lowest among 30 countries.
'That's dead last in manufacturing and dead last in services, leaving Canada as clear outlier in this sample of key peers,' said National.
Prime Minister Mark Carney will be in Toronto today to make an announcement related to 'defence and security priorities.'
Today's Data: United States wholesale trade
What is the bond market and why is everybody so worried about it?
The robots are coming! 10 predictions on what AI means for your mortgage and home
Canada's unemployment rate hits 7%, highest since 2016 outside the pandemic
The bond market has been making headlines lately as Donald Trump's 'big beautiful' bill raises concern about the state of America's finances. But just what is the bond market, how does it work and why is it such a problem when investors get jittery about it? The Financial Post explains.
Are you worried about having enough for retirement? Do you need to adjust your portfolio? Are you starting out or making a change and wondering how to build wealth? Are you trying to make ends meet? Drop us a line at wealth@postmedia.com with your contact info and the gist of your problem and we'll find some experts to help you out while writing a Family Finance story about it (we'll keep your name out of it, of course).
Want to learn more about mortgages? Mortgage strategist Robert McLister's Financial Post column can help navigate the complex sector, from the latest trends to financing opportunities you won't want to miss. Plus check his mortgage rate page for Canada's lowest national mortgage rates, updated daily.
Visit the Financial Post's YouTube channel for interviews with Canada's leading experts in business, economics, housing, the energy sector and more.
Today's Posthaste was written by Pamela Heaven with additional reporting from Financial Post staff, The Canadian Press and Bloomberg.
Have a story idea, pitch, embargoed report, or a suggestion for this newsletter? Email us at posthaste@postmedia.com.
These three provinces are most at risk as cracks appear in Canada's economy
Homeowners up for renewal are in for a wake-up call
Hashtags
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
Yahoo
16 minutes ago
- Yahoo
Foreign energy companies continuing normal operations in Iraq, official says
BAGHDAD (Reuters) -Foreign energy firms continue operating normally in Iraq, a senior Iraqi official told Reuters on Thursday, after U.S. President Trump said U.S. personnel were being moved out of the Middle East because "it could be a dangerous place". The Iraqi oil ministry did not receive any notification from operators regarding staff reductions, added the official, who oversees operations in southern oilfields. On Wednesday, sources told Reuters that the U.S. was preparing an evacuation of its Iraqi embassy due to heightened security risks in the region.
32 minutes ago
Asian shares are mixed as markets shrug at latest China-US trade deal
TOKYO -- Asian shares were trading mixed early Thursday after Wall Street's rally stalled as investors appeared not to react much to the results of the latest round of China-U.S. trade talks. U.S. futures slipped and oil prices slipped. Japan's Nikkei 225 lost 0.5% to 38,213.20. Hong Kong's Hang Seng sank 0.5% to 24,234.80, while the Shanghai Composite index edged 0.1% lower to 3,404.66. In South Korea, the Kospi gained 0.8% to 2,929.94, while Australia's S&P/ASX 200 edged 0.1% higher to 8,604.50. Taiwan's Taiex lost 0.8%. On Wednesday, the S&P 500 fell 0.3% to 6,022.24 for its first loss in four days. The Dow Jones Industrial Average was virtually unchanged at 42,865.77 after edging down by 1 point. The Nasdaq composite slipped 0.5% to 3,400.30. All told, the S&P 500 fell 16.57 points to 6,022.24. The Dow Jones Industrial Average slipped 1.10 to 42,865.77, and the Nasdaq composite sank 99.11 to 19,615.88. Several Big Tech stocks led the way lower, and a 1.9% drop for Apple was the heaviest weight on the market. It's been listless this week after unveiling several modest upcoming changes to the software that runs its devices. The action was stronger in the bond market, where Treasury yields eased after a report suggested President Donald Trump's tariffs are not pushing inflation much higher, at least not yet. U.S. consumers had to pay prices for food, gasoline and other costs of living that were 2.4% higher overall in May than a year earlier. That was up from April's 2.3% inflation rate, but it wasn't as bad as the 2.5% that Wall Street was expecting. A fear has been that Trump's wide-ranging tariffs could ignite an acceleration in inflation, just when it had seemed to get nearly all the way back to the Federal Reserve's 2% target from more than 9% three summers ago. It hasn't happened, though economists warn it may take months more to feel the full effect of Trump's tariffs. Trump said Wednesday that China will supply rare-earth minerals and magnets to the United States, while his government will allow Chinese students into U.S. universities in a deal that still needs an agreement by him and by China's leader. Trump also said that 'President XI and I are going to work closely together to open up China to American Trade. This would be a great WIN for both countries!!!' Investors are still hoping for a more sweeping trade deal that would ease tensions between the world's two largest economies. Hopes for such deals between the United States and countries around the world have been one of the main reasons the S&P 500 has charged nearly all the way back to its all-time high after dropping roughly 20% below a couple months ago. Without them, the fear is that Trump's high tariffs could drive the economy into a recession while pushing inflation higher. The S&P 500 is now sitting 2% below its record. Tesla swung between gains and losses before finishing with a rise of 0.1% to continue its shaky run. It's been recovering much of its big losses taken last week after Elon Musk's relationship with Trump imploded, which in turn raised fears about a loss of business for the electric-vehicle company. Musk on Wednesday backed away from some of his earlier comments and said they went 'too far.' In the bond market, the yield on the 10-year Treasury eased to 4.41% from 4.47% late Tuesday. Shorter-term yields, which more closely track expectations for what the Fed will do with overnight interest rates, fell more. Wednesday's better-than-expected reading on inflation raised expectations along Wall Street that the Fed could cut its main interest rate at least twice by the end of the year. In other dealings early Thursday, U.S. benchmark crude oil lost 33 cents to $67.82 per barrel. Brent crude, the international standard, shed 37 cents to $69.40 per barrel. The U.S. dollar slipped to 143.89 Japanese yen from 144.60 yen. The euro rose to $1.1520 from $1.1487.
Yahoo
42 minutes ago
- Yahoo
Lockheed Martin shares sank as much as 7% after a report that the Pentagon is halving F-35 requests for the Air Force
Lockheed Martin shares initially fell 7% after a report that the US is reducing its F-35 requests. The Defense Department has reportedly dropped its ask from 48 fighters for the Air Force to 24, The request isn't final, but it could signify changing priorities within the Pentagon under Trump. Lockheed Martin shares dropped as much as 7% on Wednesday after news that the Pentagon is asking for half of the F-35s it initially forecast for the Air Force. The defense contractor's shares recovered to $456 at market close, or about 4.2% lower from $476, the price at the end of Tuesday's trading day. Bloomberg reported on Wednesday that a procurement document sent to Congress indicated the Defense Department is requesting only 24 F-35 Lightning II Joint Strike Fighters for the Air Force, down from 48 that officials projected in the last fiscal year. Per the outlet, the document also proposed 12 F-35s for the Navy and 11 for the Marine Corps, down from 17 and 13 fighters, respectively. Business Insider could not independently verify Bloomberg's report. The Pentagon did not respond to a request for comment sent outside regular business hours. The US is by far Lockheed Martin's biggest customer for the F-35, with plans to buy 2,456 of the aircraft over several decades. The Air Force is supposed to eventually receive 1,763 of that total. When asked to comment on a possible reduction of local F-35 purchases this year, a Lockheed Martin spokesperson told BI in a statement that the fighter is "combat proven, offers the most advanced capability and technology, and is the most affordable option to ensure the US and allies remain ahead of emerging threats." "We will continue to work closely with the Administration, Congress, and our customers to deliver this game-changing capability as the budget process continues in the months ahead," the spokesperson added. A reduced ask for F-35s can potentially be changed by Congress, which is still deliberating on official defense funding for the 2025 fiscal year ending on September 30. Lawmakers have shown they're willing to fund the advanced stealth fighter beyond the Pentagon's requests. When the Air Force requested 48 F-35s from Congress last year, it was instead offered money for 51 of the planes. Doubling the requested budget, however, would be a huge jump from that smaller boost. The reported change could also signify an internal reshaping of the Pentagon's spending priorities under the Trump administration. In February, Defense Secretary Pete Hegseth asked officials to slash 8% of expenses from existing programs over the next five years so the money could be directed to Trump-favored initiatives. His announcement highlighted 17 categories protected from cuts, and the F-35 was not one of them. All of this comes as those in Trump's circles have publicly criticized the F-35 for its cost and relevance amid the rise of drone warfare. Right-wing commentator Laura Loomer, for example, slammed the F-35 program in April as a "scandal that's been quietly draining our nation's resources." And last month, Florida GOP Rep. Matt Gaetz posted on X that the fighter program was a "$1.7 trillion disaster." While some, like Elon Musk, have suggested that drones make crewed fighters obsolete, the US military says it wants to marry the two concepts instead of abandoning the latter. The Air Force has said combining crewed fighters with drone wingmen is a key priority for the F-47, its next-generation air dominance fighter. Lockheed was in the running to produce that fighter, but lost out to Boeing. However, Lockheed CEO Jim Taiclet has said that his firm wants to enhance the F-35 using the tech it created for the failed bid. Taiclet said that plans include automating the sixth-generation fighter and juicing it up to provide most of the capabilities of the F-47 for a fraction of the cost. Read the original article on Business Insider
