USD/CAD reaches multi-year highs near 1.4300 amid the Canadian political crisis

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  The Dollar rallies to fresh four-year highs against a weak Canadian Dollar.
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  Strong US economic data and the political crisis in Canada have hammered the CAD.
• Monetary divergence between the Fed and the BoC provides additional support to the US Dollar.

 

The US Dollar keeps appreciating against the Canadian Dollar and trades right below 1.4300 for the first time in four years. Concerns about the negative impact of US tariffs on Canadian products and a political crisis in Canada are crushing the Canadian Dollar.

Canada’s finance minister, Chrystia Freeland, resigned on Monday due to disagreements with the prime minister over Trump’s tariffs threats. This has brought Trudeau’s unpopular government to the brink and increased bearish pressure on the loonie.

In the US the preliminary PMI figures released on Monday revealed that the services sector’s activity expanded at its fastest pace in three years, confirming that the economy keeps growing at a healthy pace.

Later today, the US Retail sales are expected to confirm this view, with a 0.5% monthly rise after a 0.4% increase in October. Excluding vehicles, sales of all other products are expected to have accelerated at a 0.4% pace in November from 0.1% in October.

Monetary policy divergence between the Fed and the BoC weighs in the CAD

These strong figures have not challenged the view that the Fed will cut rates by 25 basis points on Wednesday but they have raised concerns about a hawkishly tilted statement, pointing to a shallow easing cycle in 2025.

The Bank of Canada, on the other hand, slashed interest rates by 50 bps last week. This is the second consecutive such move and the Bank has hinted towards further easing.

BoC’s Governor Macklem confirmed that theory on Monday and added weigh on an already weak loonie, warning that the below forecast economic growth will keep inflation subdued.