Canadian Dollar Falls Near 70¢ U.S. as Canada–U.S. Interest-Rate Gap Widens to 157 Basis Points

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The Canadian dollar is once again testing a level that tends to get noticed far beyond trading desks. On Friday, the loonie weakened to about 70.14 U.S. cents, extending a fourth straight weekly decline after touching an 18-month low a day earlier. At the same time, the Canadian two-year government bond yield fell roughly 157 basis points below the comparable U.S. yield, the widest spread since February 2025.

That gap matters because investors compare returns across borders when deciding where to hold money. Still, interest-rate differences are only part of the story. Oil prices, economic growth, inflation, trade uncertainty and demand for U.S. dollars are also shaping the exchange rate. For Canadian households and businesses, a near-70-cent loonie can show up in everything from imported equipment and groceries to travel budgets and export revenues.

The Loonie Is Back Near a Psychological Line

A move toward 70 U.S. cents is significant partly because it is easy for households and businesses to understand. On Friday, the Canadian dollar traded near C$1.4257 per U.S. dollar, equivalent to about 70.14 U.S. cents, after reaching C$1.4263 on Thursday, its weakest point in roughly 18 months. The currency was down about 0.8% for the week, putting it on course for a fourth consecutive weekly decline. For a market that often moves in fractions of a cent, several weeks of steady losses can quickly change how importers, travellers and investors think about currency risk.

The level also revives memories of previous periods when the loonie hovered around or below 70 cents. That does not mean the currency is automatically headed much lower. Exchange rates can reverse quickly when bond yields, commodity prices or market sentiment shift. But the latest move shows that the Canadian dollar has lost some of the support it had earlier in the year, while the U.S. dollar continues to benefit from comparatively attractive yields and global demand.

The 157-Basis-Point Gap Is a Bond-Market Signal

The headline 157-basis-point figure needs an important distinction. It refers to the gap between Canadian and U.S. two-year government bond yields, not a simple subtraction of the Bank of Canada policy rate from the Federal Reserve’s target range. On Friday, the Canadian two-year yield moved further below the comparable U.S. Treasury yield, widening the spread to about 157 basis points. Because two-year yields reflect expectations about where central-bank rates may sit over the next several years, the spread acts as a real-time measure of how differently investors view the two economies and their policy paths.

Lower Canadian yields make Canadian fixed-income assets less attractive relative to U.S. alternatives, all else equal. Bank of Canada research has found that widening Canada–U.S. interest-rate differentials can weigh on the loonie because investors receive higher returns from U.S.-dollar assets. The Bank has also stressed that rate gaps do not explain everything. Risk premiums, oil prices, productivity, trade policy and broader global demand for U.S. dollars can matter just as much—or more—during volatile periods.

Central Banks Are Moving on Different Tracks

The bond-market gap has widened against a backdrop of clearly different central-bank settings. The Bank of Canada held its overnight rate at 2.25% on September 2, saying growth and inflation were broadly evolving as expected but warning that high energy prices and new trade measures created uncertainty. The Bank has kept that rate unchanged through every decision so far in 2026, after cutting it to 2.25% in October 2025. That relatively low policy setting reflects a Canadian economy that has spent much of the past year operating with excess supply and uneven growth.

The Federal Reserve moved the other way in September. On September 16, it raised the federal funds target range by 25 basis points to 3.75%–4.00%, citing still-elevated inflation and resilient U.S. activity. The midpoint of that range is 1.625 percentage points above the Bank of Canada’s 2.25% rate. Markets do not price currencies from policy rates alone, but the contrast helps explain why shorter-term U.S. bond yields have remained well above Canadian yields.

Weak U.S. Hiring Changed the Rate Debate, Not the Currency Story

One development that could have narrowed the yield gap arrived Friday morning: the U.S. jobs report. The Bureau of Labor Statistics said employers added only 29,000 jobs in September, while the unemployment rate edged up to 4.2%. July and August payrolls were revised down by a combined 60,000 jobs, and average hourly earnings rose just 0.1% during the month. The softer report reduced market expectations for another Federal Reserve rate increase at its October meeting because policymakers now have clearer evidence that the labour market is cooling.

Yet the Canadian dollar still weakened on the day. That is a reminder that a single data release rarely controls a currency for long. U.S. yields remain substantially above Canadian yields, and investors are still weighing elevated inflation, energy prices and the possibility of further Federal Reserve tightening later in the year. The result is an unusual mix: weaker U.S. employment data may slow the Fed’s next move, but the existing rate advantage still provides support for U.S.-dollar assets.

Canada’s Growth Data Leave Markets Cautious

Canada’s own economic data have not given investors a strong reason to expect a sharp rise in domestic yields. Statistics Canada reported that real GDP by industry was essentially unchanged in July. Construction grew 1.3% and utilities rose 1.7%, but manufacturing fell 0.9%, mining, quarrying and oil and gas extraction declined 0.5%, retail trade contracted 1.0% and wholesale trade fell 0.4%. The details showed an economy with pockets of strength but little broad momentum at the start of the third quarter.

There was one encouraging sign: Statistics Canada’s advance estimate indicated that real GDP increased 0.2% in August, led by mining, quarrying and retail trade. That estimate remains preliminary until the official August release on October 30. For currency markets, the broader point is that Canadian growth has been uneven while the U.S. economy has remained comparatively stronger. When investors expect softer growth in Canada, they are less likely to price aggressive Bank of Canada tightening, which can keep Canadian short-term yields below U.S. yields.

Oil Is Still Part of the Loonie Equation

Canada is a major energy exporter, so oil remains one of the variables currency traders watch closely. On Friday, U.S. crude futures were trading around US$91.40 a barrel, down about 1.6% as G7 countries agreed to release 100 million barrels of diesel and crude oil from emergency reserves. The announcement helped pull energy prices lower after a period of intense volatility. For the loonie, falling oil prices can remove a source of support because weaker energy prices can reduce the value of Canadian export revenues and the amount of foreign currency flowing into the country.

The relationship is not mechanical, however. Canada’s energy trade is enormous: the Canada Energy Regulator reported that crude oil, refined petroleum products, natural gas and natural gas liquids exported to the United States were worth C$157.5 billion in 2025. At the same time, Bank of Canada research has noted that the historical link between oil and the loonie has weakened compared with earlier decades. Oil still matters, but interest rates, risk sentiment and trade conditions increasingly share the stage.

A 70-Cent Dollar Reaches Household Budgets Through Imports

A weaker currency becomes tangible when a Canadian household or business has to pay for something priced in U.S. dollars. The Bank of Canada has repeatedly noted that depreciation raises the cost of imported goods and services. The pass-through is not immediate or complete because retailers may absorb some of the increase in margins, hedge currency exposure or delay price changes. Even so, a sustained decline in the loonie can eventually raise prices for imported vehicles, electronics, clothing, food ingredients, travel services and other goods with foreign-currency costs.

The same arithmetic applies to travel. A US$1,000 hotel bill costs about C$1,426 before taxes and fees when the exchange rate is near C$1.426 per U.S. dollar. That is roughly C$126 more than it would cost at parity and illustrates why currency moves are noticed quickly by families planning U.S. trips. For businesses, the stakes can be larger. A company importing US$500,000 of equipment faces a Canadian-dollar bill of roughly C$713,000 at the same exchange rate before any hedging or financing costs.

Exporters Get a Competitive Lift, but It Comes With Trade-Offs

The weaker loonie is not universally negative. Canadian companies that sell into the United States and collect U.S. dollars can receive more Canadian dollars when those revenues are converted back home. The Bank of Canada’s July outlook specifically noted that recent depreciation was helping make Canadian exports more competitive. That can be valuable for manufacturers, resource producers and service firms competing for U.S. customers, particularly when pricing contracts in U.S. dollars.

But the benefit can shrink when exporters rely heavily on imported inputs. Canadian businesses buy substantial amounts of machinery, equipment, components and technology from abroad, and a weaker dollar raises those costs. Statistics Canada reported that Canada exported C$76.1 billion of goods in July and imported C$75.4 billion. Exports to the United States fell 6.6% that month, while shipments to countries other than the United States reached a record C$25.6 billion. The picture is therefore mixed: currency depreciation can improve competitiveness, but trade volumes, tariffs, foreign demand and imported production costs ultimately determine whether individual companies come out ahead.

The Weaker Dollar Complicates the Inflation Picture

Canada’s inflation backdrop makes the currency decline especially important. Statistics Canada reported that the Consumer Price Index rose 3.0% year over year in August, matching July’s pace. Gasoline was still 22.8% more expensive than a year earlier, while CPI excluding gasoline increased 2.4%. The Bank of Canada’s preferred core measures were calmer: CPI-median was 2.0% and CPI-trim was 1.9% in August. That split helps explain why policymakers are being cautious rather than reacting to headline inflation alone.

A weaker loonie introduces another source of cost pressure. The Bank of Canada’s July Monetary Policy Report explicitly identified currency depreciation as a factor that raises import prices and warned that more persistent pass-through could lift inflation. That creates a balancing problem. Raising rates could support the currency and restrain inflation, but it would also increase borrowing costs in an economy where growth has been uneven. Leaving rates lower for longer supports domestic activity, yet it can preserve the yield disadvantage against the United States.

October’s Data Calendar Could Reset the Spread Again

The 157-basis-point two-year yield gap is large, but it is not fixed. Canada’s September Labour Force Survey is scheduled for October 9, followed by September CPI on October 19. Those releases will give markets a fresher read on whether Canadian growth and inflation are strong enough to justify a different Bank of Canada path. The Bank’s next policy decision comes on October 28, when it will also publish a new Monetary Policy Report. Any change in the expected rate path could move Canadian bond yields quickly.

The Federal Reserve is scheduled to meet October 27–28, creating an unusually concentrated window for the Canada–U.S. rate story. Markets will also absorb U.S. inflation, employment and spending data before then. If investors become convinced that the Fed is finished raising rates while the Bank of Canada turns more cautious about inflation, the yield spread could narrow. If U.S. rates stay higher for longer and Canadian growth remains soft, the gap could remain wide. For now, the loonie’s move toward 70 cents reflects that unresolved divergence.

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