On February 5, tensions in the financial markets were palpable, with the Canadian dollar experiencing a slight decline against its U.S. counterpart. Investors exhibited a growing risk aversion, yet the decrease was tempered by remarks from Bank of Canada Governor Tiff Macklem, who dismissed the likelihood of further interest rate cuts to bolster the economy.
The Canadian dollar, often referred to as the loonie, was trading 0.1% lower at 1.3675 per U.S. dollar, equivalent to 73.13 U.S. cents, after fluctuating within a range of 1.3653 to 1.3699.
Meanwhile, the U.S. dollar reached a near two-week high amid fresh volatility in Wall Street.
Governor Macklem stated that restructuring Canada’s economy to adapt to U.S. tariffs, slower population growth, and the rise of artificial intelligence will take considerable time and could be quite challenging. He expressed that “his hands were tied” in addressing the economic weaknesses attributed to ongoing structural changes.
According to Royce Mendes, head of macro strategy at Desjardins, “In his view, further cutting interest rates would merely exacerbate inflation, as aggregate demand would hit the limits of the economy’s reduced productive capacity.”
The Bank of Canada has set the benchmark interest rate at 2.25%, the lower end of a neutral range estimated between 2.25% and 3.25%, a level that neither stimulates nor restricts economic activity. Market expectations are leaning towards an increase in rates in the near future.
A Reuters poll indicates that while the Canadian dollar may relinquish some recent gains over the upcoming months, it could regain its upward trend if the Bank of Canada opts for rate hikes and the U.S. dollar faces selling pressure.
Friday’s employment data for Canada, set to be released, may offer further insights into future monetary policy, with analysts predicting a modest gain of 5,000 jobs for January.
In commodity markets, the price of oil, one of Canada’s major exports, fell by 2.8%, driven by easing concerns over Iranian crude supplies.
Canadian bond yields saw a decline across a flatter curve, following the trends set by U.S. Treasuries. The yield on the 10-year bond fell by 3.7 basis points, landing at 3.408%.
Reporting by Fergal Smith; Editing by Will Dunham
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