The Canadian dollar slid to its weakest level since October 15 on Tuesday, as hotter-than-expected US inflation data lifted the US dollar and reinforced expectations that the Federal Reserve will raise interest rates again in December.
The loonie fell about 0.5% to around 1.4185 per US dollar, after briefly touching 1.4210 earlier in the session. The move came as traders adjusted their bets on the path of US monetary policy, with markets now fully pricing in a quarter-point hike at the Fed's December meeting.
What's driving the move?
The trigger was the latest US consumer price index (CPI) report, which came in above forecasts. Hot inflation readings tend to push bond yields higher and strengthen the US dollar, because they suggest the Fed will need to keep policy tight for longer to bring price pressures under control.
That dynamic was on full display across global markets. The greenback gained broadly, and the stronger dollar pressured oil and gold prices, while Treasury yields climbed and tech stocks took a hit. The Canadian dollar, often sensitive to shifts in US rate expectations, was among the currencies that felt the squeeze.
For the loonie, the key issue is the gap between US and Canadian interest rates. In markets tied to central-bank "swap" contracts—financial instruments that let investors bet on future policy moves—traders were fully pricing a Fed hike in December. At the same time, the odds of a Bank of Canada (BoC) rate move next month were sitting below 50%.
That expected divergence matters because higher interest rates in the US relative to Canada make US assets more attractive to global investors, drawing capital away from Canadian dollar-denominated investments and putting downward pressure on the currency.
What it means for investors
For everyday investors, a weaker loonie has a few practical implications. First, it makes imported goods more expensive, which can feed into Canadian inflation. Second, it affects the returns on foreign investments—if you hold US stocks or funds, a lower loonie can boost the value of those holdings when converted back to Canadian dollars.
But the bigger picture is about the path of interest rates. If the Fed hikes in December while the BoC holds steady, the rate gap will widen, likely keeping the loonie under pressure. That could continue to benefit Canadian investors with US exposure, but it also raises the cost of borrowing in US dollars and can squeeze Canadian companies that rely on imports.
The TSX slipped 0.4% on the day, with gold miners among the losers as the stronger dollar weighed on bullion prices. Meanwhile, December Fed hike odds climbed to near 99%, a level that suggests the market is treating a move as all but certain.
What to watch next
Investors will be watching upcoming US economic data and Fed commentary for any sign that the central bank might soften its stance. A cooler inflation print next month could ease pressure on the loonie, while another hot number could push it even lower.
On the Canadian side, the BoC's next decision will be closely scrutinized. If the bank signals it is open to further tightening, that could help support the currency. But with the economy showing signs of slowing, many analysts expect the BoC to stay on hold for now.
For now, the loonie's fate is largely tied to the Fed. As long as US inflation remains sticky, the dollar is likely to stay firm, and the Canadian dollar may continue to trade near recent lows.
