**Canadian Dollar Slips to Nearly Three-Week Low Amid Slumping Bond Yields and Stronger U.S. Dollar**
*By Fergal Smith, originally published by The Globe and Mail*
The Canadian dollar recently slipped to its lowest value in nearly three weeks as domestic bond yields declined, weighed down by recent economic data suggesting weakening momentum inside the Canadian economy. At the same time, the strength of the U.S. dollar, buoyed by resilient U.S. economic indicators and hawkish commentary from the Federal Reserve, has pressured the loonie further.
As of late trading on Tuesday, the Canadian dollar was quoted 0.6 percent lower at 1.3773 against the U.S. dollar, or roughly 72.60 U.S. cents. This makes it the weakest level for the currency since May 14.
Several factors point to why the loonie has taken a hit in recent days:
## Domestic Bond Yields Drop Sharply
Canadian government bond yields experienced a noticeable decline, contributing to the Canadian dollar’s weakness.
– The yield on Canada’s 2-year bond fell 13.8 basis points, ending the day at 4.267 percent.
– The 10-year bond yield dropped 11.2 basis points to settle at 3.515 percent.
This slide in yields suggests that markets have started to price in an increased likelihood of rate cuts from the Bank of Canada (BoC), a shift from earlier expectations where the BoC was more likely to hold rates higher for longer.
According to strategist Erik Nelson from Wells Fargo in London, “Canadian rates reacted a bit more dovishly than other markets,” underscoring the growing divergence between Canadian and American interest rate outlooks.
## Weak Canadian Economic Data Signals Cooling Activity
Recent Canadian economic indicators are painting a picture of a cooling economy. The latest monthly Gross Domestic Product (GDP) report, released by Statistics Canada, missed expectations:
– Canada’s GDP was flat in March, a sign of stagnation at the national level.
– The overall growth for the first quarter landed at 1.7 percent annualized, falling short of analysts’ predictions that had been closer to 2.2 percent, according to a Reuters poll.
This softer-than-expected economic expansion has amplified speculation that the Bank of Canada could act soon to cut rates in order to stimulate growth.
As a result, money markets are now pricing in a 72 percent chance that the BoC will lower its benchmark interest rate by 25 basis points at its upcoming meeting on June 5. A full 25-basis-point cut is fully baked into expectations by July.
## Interest Rate Divergence: BoC vs. U.S. Federal Reserve
Bank of Canada Governor Tiff Macklem recently noted that the central bank is weighing a wide range of indicators before making its next policy move. However, unlike the U.S. Federal Reserve, the BoC has greater flexibility to initiate rate cuts due to weaker inflationary pressures and slower growth.
On the other side of the border, however, U.S. economic dynamics remain markedly stronger and more complex in terms of monetary policy.
– The U.S. labor market remains tight, keeping pressure on wage inflation.
– U.S. GDP growth, although slowing slightly, continues to outperform expectations.
– The Federal Reserve has indicated it is willing to maintain higher rates for longer until inflation convincingly returns to its 2 percent target.
Comments from Fed officials have consistently leaned hawkish, with several suggesting that more progress on inflation is needed before considering rate cuts. This has strengthened the U.S. dollar, particularly against currencies such as the Canadian dollar, which are more sensitive to commodity prices and domestic monetary policy shifts.
## Commodity Prices Offer Limited Support
The Canadian dollar often strengthens when oil prices rise, given Canada’s status as a major crude oil exporter. However, that historical correlation appears to be providing only limited support recently.
– U.S. crude futures decreased by 1.4 percent to US
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