Canadian Dollar Hits 4.5-Year Low Amid Economic Woes, Political Turmoil

The Canadian dollar plunged to a 4.5-year low as a mix of economic headwinds and political uncertainty deepened concerns over Canada’s growth outlook. Falling interest rates, a rising jobless rate, and the sudden resignation of Finance Minister Chrystia Freeland intensified pressure on Prime Minister Justin Trudeau’s minority government, already weakened by waning public and political support.

The Bank of Canada (BoC) slashed its policy rate by 50 basis points to 3.25%, its fifth consecutive cut, as Governor Tiff Macklem acknowledged a fragile economy marred by six straight quarters of shrinking per capita GDP. While inflation has returned to the 2% target, Macklem signaled a shift from aggressive rate cuts to a more cautious easing strategy, citing global uncertainties: trade protectionism, demographic shifts, and the potential shock of U.S. tariffs under President-elect Donald Trump.

The labor market echoed this weakness, with November’s jobless rate spiking to 6.8%, its highest in nearly eight years outside the pandemic. Wage growth slowed, and employment gains struggled to keep up with a surging labor force, amplifying concerns about sluggish demand and an economy operating below potential. Markets now heavily bet on another 50-basis-point rate cut, reflecting a deteriorating outlook.

Politically, Freeland’s resignation and Canada’s response to Trump’s proposed 25% tariffs on Canadian exports are testing Trudeau’s leadership. While Freeland vowed a "robust" response to U.S. tariffs, divisions among provincial leaders over potential retaliatory export taxes—particularly from resource-heavy Saskatchewan and Alberta—reveal internal fractures that could complicate a unified strategy.

Trudeau’s government faces immense pressure to balance fiscal discipline with spending measures to bolster confidence. Promises of cash handouts, tax breaks, and border security enhancements may provide short-term relief but risk further straining federal finances amid slower growth and mounting debt.

The U.S. dollar strengthened in volatile trading as investors prepared for key central bank decisions this week, particularly the Federal Reserve's expected quarter-point rate cut on Wednesday. Markets see a 94%-97% chance of the cut but remain uncertain about further easing in 2025, with expectations leaning toward fewer rate reductions amid signs of economic resilience.

U.S. economic data presents a mixed picture. Services-sector activity reached a three-year high, and Q4 GDP is tracking at 3.3%, lifting yields and supporting the dollar. Meanwhile, manufacturing remains weak, with December's PMI dropping to 48.3, its lowest in over four years, due to persistent challenges and tariff concerns.

The labor market, however, remains robust, with evidence of workers finding better-aligned, flexible opportunities, boosting productivity. The Fed’s focus is increasingly on productivity trends, which have averaged 1.8% growth since 2019 and show promise from the rise of AI tools. These gains could help offset labor shortages, potentially mitigating inflation risks.

Bond investors are cautious ahead of the rate decision, favoring shorter-term Treasuries amid concerns of persistent inflation under a Trump administration. Higher inflation expectations have led to a selloff in longer-dated bonds, pushing yields upward. The Fed's policy path remains uncertain, as officials weigh economic resilience, productivity gains, and inflation risks, shaping expectations for monetary easing in 2025.

Data for Technical Analysis (30Min) CFD USD/CAD

Resistance : 1.4246, 1.4247, 1.4249

Support : 1.4242, 1.4241, 1.4239

30Min Outlook

Source: TradingView

Buy/Long 1 If the support at the price range 1.4237 - 1.4242 is touched, but the support at 1.4242 cannot be broken, the TP may be set around 1.4247 and the SL around 1.4235, or up to the risk appetite.

Buy/Long 2 If the resistance can be broken at the price range of 1.4246 - 1.4251, TP may be set around 1.4254 and SL around 1.4240, or up to the risk appetite.       

Sell/Short 1 If the resistance at the price range 1.4246 - 1.4251 is touched, but the resistance 1.4246 cannot be broken, the TP may be set around 1.4242 and the SL around 1.4253, or up to the risk appetite.

Sell/Short 2 If the support can be broken at the price range of 1.4237 - 1.4242, TP may be set around 1.4236 and SL around 1.4248, or up to the risk appetite.       

Pivot Points Dec 17, 2024 02:36AM GMT