Canadian Dollar Slides amidst Economic Woes, Rate Cut Bets

The Canadian dollar depreciated against the U.S. dollar on Friday, extending its weekly decline by 0.5%. Retail sales declined 0.3% in January, indicating a potential economic slowdown. The Bank of Canada is considering rate cuts in June due to slowing inflation and a dovish stance among other central banks. The U.S. dollar strengthened against other major currencies after Switzerland's surprise rate cut, while Canadian bond yields decreased, following the trend in U.S. Treasuries.

Canadian Dollar Declines Amidst Economic Slowdown and Rate Cut Anticipation

Toronto, Canada - The Canadian dollar experienced a decline against the strengthening U.S. counterpart on Friday, culminating in a weekly loss of 0.5%. This depreciation aligns with recent evidence of an economic slowdown in Canada, further fueling expectations of interest rate cuts.

The Canadian currency, commonly known as the "loonie," dropped by 0.6% to trade at 1.3605 against the U.S. dollar, hovering near its three-month low of 1.3613 reached earlier in the week.

According to Statistics Canada, retail sales in Canada decreased by 0.3% in January compared to December, despite a 0.2% increase in sales volume. A preliminary estimate suggests a modest 0.1% uptick in February.

"While today's retail sales report marginally exceeded expectations, it corroborates the ongoing weakening of domestic consumer demand, which has been hampering the Canadian economy's growth trajectory," stated Karl Schamotta, Chief Market Strategist at Corpay.

"The Bank of Canada (BoC) remains vigilant to the potential risks posed by a recurrence of last year's housing market surge, but it appears increasingly likely that rate cuts will be implemented at their June meeting," Schamotta added.

Money market participants have heightened their expectations for a BoC rate cut in June, with approximately 70% likelihood, following data released on Tuesday that indicated a cooling inflation rate to an annualized 2.8%.

Meanwhile, the U.S. dollar continued its upward trend against a basket of major currencies for the second consecutive week. This appreciation stems from a contrast in monetary policy between the Federal Reserve and other major central banks, exemplified by a surprise rate cut by the Swiss National Bank.

"Global central banks have adopted a predominantly dovish stance this week, while the Federal Reserve's economic projections suggest a more hawkish outlook for medium- to long-term interest rates," Schamotta noted.

In response to the U.S. dollar's strength, Canadian bond yields declined across the yield curve, mirroring the movement in U.S. Treasuries. The benchmark 10-year Canadian government bond yield decreased by 7 basis points to 3.447%.