Canadian Dollar Struggles Amid Negative Yield Spread, Weak Oil Prices
The Canadian dollar is facing three strikes against it, which may lead to further weakness. According to Brooke Thackray, one of the major drivers of the Canadian dollar's value is the two-year yield spread between Canadian and U.S. government bonds. The spread has become increasingly negative since early August, with the two-year yield increasing at a slower rate in Canada compared to the U.S.
The Bank of Canada faces a difficult task as it tries to balance the economy's weakness against inflation threats. Given the real estate sector's significant impact on the Canadian economy, the bank must be cautious about raising interest rates. The spread has decreased faster than the value of the Canadian dollar, indicating possible further weakness ahead.
Another major driver of the Canadian dollar is the price of oil. Canada is a net exporter of oil, and when the price increases, it tends to boost the value of the Canadian dollar and vice versa. However, after a strong rally from early July, the price of oil has been decreasing since mid-September.
The U.S. dollar's strength against a basket of major world currencies is also putting downward pressure on the Canadian dollar. The DXY index has crossed above the critical 100 level, which many international traders follow, indicating that the Canadian dollar may struggle to perform well.