Loonie Slumps as US Yields Pull Away from Canada
Canada's Loonie is experiencing its steepest weekly drop since March as US interest rates surpass those in Canada, making the Canadian dollar less attractive to hold.
The main driver behind this decline is the widening gap between short-term government bond yields. The difference between US and Canadian 2-year yields has reached a 153 basis point (1.53 percentage point) spread, its widest since February 2025.
This discrepancy in yields matters because higher returns attract more money into a currency. In this case, investors are leaning towards the US dollar due to its higher 'interest pay'. The move also reflects diverging economic momentum, with recent US data showing stronger signals compared to Canada's softer indicators.
The impact of a weaker Loonie is already being felt by Canadian travelers, cross-border shoppers, and those paying for USD-priced subscriptions or online purchases. A lower currency can lead to higher import costs filtering into Canadian prices as wholesalers and retailers adjust their charges in Canadian dollars.