By Fergal Smith
TORONTO (Reuters) – The Canadian dollar weakened to its lowest level in nearly two years against the dollar on Friday and the Canadian stock market fell as investors grew cautious ahead of domestic inflation data and the Federal Reserve’s rate decision next week.
The Canadian dollar was trading down 0.3 percent at 1.3270 per dollar, or 75.36 US cents, after touching its weakest level since November 2020 at 1.3307. Over the course of the week, the index fell 1.8 percent, its biggest weekly decline since June.
This comes on the heels of higher-than-expected US inflation data on Tuesday that spooked financial markets globally and pushed the US dollar sharply higher against a basket of major currencies.
“The dollar is an unstoppable powerhouse right now, with higher-than-expected inflation and a hawkish Fed sucking capital into the US and hurting the rest of the global economy,” said Carl Chamota, head of marketplace. Strategist at Corpay.
Money markets expect the Federal Reserve to raise interest rates by three-quarters of a percentage point next Wednesday.
The World Bank said Thursday that the global economy may be slowly heading into a recession.
Canada is a major exporter of commodities, including oil, so the Canadian dollar tends to be particularly sensitive to the global economic outlook.
In a possible sign that investors are anticipating a recession, the inversion of the Canadian yield curve has grown further.
The 10-year yield is 68 basis points below the two-year yield, after the latter touched its highest intraday level since December 2007 at 3.870%.
Canadian inflation data for August is due next Tuesday, with all eyes on core price pressure gauges.
“Market participants, who were affected by Tuesday’s US (data) surprise… are preparing for a set of outcomes,” Chamota said.
The cautious mood extended to the stock market, with both Wall Street and the Toronto stock market trading lower.
“Markets are in a somewhat risk-free state,” said Greg Taylor, portfolio manager at Purpose Investments. “The real fear is that we’re going to start to see some profit warnings from companies as the economy starts to slow down.”
The S&P/TSX Composite Index on the Toronto Stock Exchange closed 0.9% lower at 19,385.88, the lowest closing level since September 7, including declines in technology, energy and financial stocks.
The index lost 2% for the week.