The Canadian Dollar (CAD) has experienced a significant decline in its FX macro fundamental scorecard over the past nine weeks.
This drop, which is the largest seen alongside the Norwegian Krone (NOK), has been driven by a sharp fall in Canada’s terms of trade and early indications of tariff-related damage in its labor market and sentiment surveys.
Canada’s economy is already showing signs of strain, and with a significant debt pile, the country is particularly vulnerable in a global environment of rising yields. This vulnerability is compounded by the fact that a decision on a rate cut by the Bank of Canada is imminent. The probability of this decision is seen as roughly equal, suggesting that it could significantly impact the CAD, regardless of the outcome.
The potential rate cut comes at a time when Canada’s economy is grappling with numerous challenges. Notably, the country’s terms of trade have deteriorated dramatically, and its labor market is starting to show the effects of tariffs, as evidenced by recent sentiment surveys.
Furthermore, Canada’s large debt pile makes it one of several countries that are acutely susceptible to a world of rising yields. This susceptibility could be further exacerbated by the Bank of Canada’s upcoming decision on a rate cut, which is currently seen as a coin toss. This means that regardless of whether the bank decides to cut rates or not, the decision is likely to have a significant effect on the CAD.
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