The Canadian dollar continued its downward trend on Tuesday morning, slipping to just under 1.3740 (USD/CAD). This latest slide was due to Canadian government 10-year bond yields rising by 1.1 basis points to 4.024%.
Rising bond yields in the context of the Canadian dollar can be indicative of a global shift from riskier assets (like equities and the Canadian dollar) to safer assets (like Canadian government bonds or US Treasuries). If investors are fleeing riskier assets and currencies, they might also be moving away from commodity-linked currencies like the CAD, especially if there are concerns about global growth and, consequently, demand for commodities. All of this is bad news for the Canadian dollar, especially when compared to the US dollar, which stands to benefit when risk rises.
Interestingly, a forecast released by BMO pegs the Canadian dollar at 1.37 for the next month before gradually dropping to 1.35 in 3 months and descending all the way to 1.28 in 12 months. A slightly more aggressive forecast by Monex places the Canadian dollar in the same 1.37 range in the short term but sees it declining more modestly by the end of the 12-month phase to 1.34.
Both forecasts indicate the Canadian dollar could significantly underperform if there is any further escalation in the conflict in the Middle East and if the Canadian economy deteriorates faster than expected.
The Canadian dollar is currently trading at 1.3733 against the US Dollar.
