TORONTO, Dec 17 (Reuters) - The Canadian dollar weakened to nearly a five-year low against its U.S. counterpart on Tuesday, hurt by domestic political unrest as well as a wider gap between Canadian and U.S. bond yields after data showed a surprise easing of Canadian inflation.
The loonie was trading 0.6% lower at 1.4323 per U.S. dollar, or 69.82 U.S. cents, its weakest level since March 2020.
"The driver today seems to be the ongoing rally in Canadian yields on a relative basis," said Benjamin Reitzes, Canadian rates and macro strategist at BMO Capital Markets.
"Sentiment is still pretty negative on the Canadian economy and the macro backdrop. Add in the political dysfunction, and that does not look kindly on the Canadian dollar at this point."
The abrupt resignation of Canada's finance minister leaves the government adrift less than a month before the inauguration of a second Trump administration that could impose crippling sanctions on Canadian exports.
"We think this level of political turbulence will raise uncertainty levels for Canadian consumers and businesses, adding to the headwinds already facing productivity-enhancing investment," Karl Schamotta, chief market strategist at Corpay, said in a note.
Canada's annual inflation rate declined to 1.9% in November from 2% in October. Measures of underlying inflation closely watched by the Bank of Canada were higher, but money markets continued to lean toward another interest rate cut by the central bank in January.
The Canadian 10-year yield eased 4.2 basis points to 3.149%, moving 2.8 basis points further below its U.S. equivalent to a gap of 124 basis points. That's the widest spread in LSEG data going back to 1994.
The price of oil, one of Canada's major exports, fell 1.6% to $69.57 a barrel on Chinese demand concerns and ahead of a Federal Reserve interest rate decision on Wednesday.
Reporting by Fergal Smith; Editing by Paul Simao
