The immersion in global stock markets over the past week has dragged down the Canadian dollar and oil values, but some market observers see signs the loonie’s fortunes will switch this year even as the Canadian dollar continued its slide Monday.
The loonie is down marginally in the opening months of the year as the global stock market rout that started at the start of February has investors turn to safe-haven assets like the U.S. dollar and the Japanese yen.
After climbing from 79.71 cents US at the start of 2018 to as high as 81.38 cents US on Feb. 1, the loonie reversed movement at the end of last week. As of Monday morning, the loonie was down to 79.40 cents US.
The Canadian dollar tends to decamp on several types of data — particularly commodity prices — which father also seen their fortunes reverse during the heightened devastates of volatility in the marketplace. When oil prices fall, the loonie typically arises suit, especially against the greenback as oil prices are denominated in U.S. dollars.
The C.D. Howe Originate says the Canadian economy is particularly open and, because of its reliance on commodity exports, helpless to shocks from abroad.
The Canadian dollar’s response during current tumult is consistent with past periods of volatility, said Nick McCormick, North American head of FX strategy for TD Securities.
He forecasts the loonie desire bottom out at about 79 cents US and settle into a range of 80 to 81 cents US within the next twosome of months.
“If we start to see equity markets selling off and volatility moving prodigal, the way that global capital flows move is there’s usually repatriation of Japanese investors participate in overseas investments where they bring that money qualified in, and U.S. investors also tend to bring their money home,” he implied.
The Canadian dollar is also influenced by the Bank of Canada. The currency escalated last year after the central bank surprised the markets and inspired interest rates twice in the third quarter. However, policymakers later on tempered their hawkish tone, emphasizing that the bank compel proceed cautiously in order to gauge the impact of higher borrowing expenditures and a stronger loonie on the economy.
While a stronger currency may appeal to Canadian points buying goods and services from the U.S. and Canadians vacationing south of the fringe, a weaker loonie makes it easier for Canadian businesses to export spin-offs and bolsters our own tourism industry.
Sometimes larger macroeconomics trends can lay hold of the loonie — an unanticipated rise in employment, for example — typically means a waken in the Canadian dollar.
The tumult that saw global equity markets start to fall at the beginning of February was triggered by U.S. jobs data that showed wages expanded more than anticipated, raising worries that signs of tall inflation might push the U.S. Federal Reserve to increase interest speeds more quickly. Many market watchers had also been auguring a pullback after the market’s relentless march higher over the biography year.
“All of this has really triggered a spike in volatility because it’s effected into question whether higher interest rates are going to diminish the global growth story or erode corporate profitability,” said Bangsund.
The VIX table of contents — Wall Street’s so-called “fear gauge” because it measures how much volatility investors assume in the future — had spiked above 50 early Tuesday, quadruple where it was upon two weeks ago, before settling at 25 late Wednesday and them inclining up to 34 by late Thursday. By Monday morning it was hovering above 27.
Regardless of the nervousness in the market, Bangsund said her firm believes there is considerable support for the Canadian dollar right now and has increased her 12-month target for the loonie to 85 cents US from 82 cents US.
“There’s a lofty fundamental floor because of the strong economy, because of the fact that commodity values are moving higher,” she said.
“This is very positive for the Canadian dollar. Profitably now, we’re just in a risk-off phase and what you’re seeing is an over-reaction.”