Loonie struggles: This is what is dragging the Canadian dollar lower

The Canadian dollar’s decline against the greenback is partly due to its close association with resource and commodity prices, according to a forex strategist, making it sensitive to fluctuations in global growth and stock market trends.

The Canadian dollar fell below 75 cents in the US on Monday morning, its lowest level since early November 2020. Shaun Osborne, a chief foreign exchange strategist at Scotiabank, said in a note to clients on Monday about the current risk backdrop and the US stock market trends are the main factors driving the Canadian currency’s decline.

“The Canadian dollar is generally treated as a so-called high-beta currency. That is, it was a resource-based economy, the Canadian dollar and its links to resource prices [and] Commodity prices are sensitive to fluctuations in global growth or the outlook for global growth,” Osborne said in a phone interview Monday morning.

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Stock market trends are an important gauge of investor opinion on growth prospects, Osborne said.

“So what we saw was that weaker stocks or stronger stocks in general had a pretty important impact on the Canadian dollar,” he said.

On a rolling one-month basis, Osborne said the Canadian dollar was about 82 percent correlated with US stock markets as of Monday morning.

“The risk background or stock market background has a pretty strong impact on that [Canadian dollar’s] performance,” he said.

Among the major global currencies, the loonie is among the most highly correlated with equity markets, according to Osborne.

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Monetary tightening continues to be a key factor behind the risk backdrop in US equity markets.

US interest rates have risen rapidly, Osborne said, amid “firm inflation numbers.” Amid continued inflation, Osborne said another aggressive rate hike by the US Federal Reserve is likely this week, which could keep the greenback high against Canada’s currency.

“We’ve seen interest rate differentials move more in favor of the US dollar. This will also marginally support the US dollar,” he said, adding that markets expect the Fed to maintain its hawkish stance.

Markets are pricing in another three-quarters-of-a-point rate hike from the US Federal Reserve later this week.

Another key factor in assessing the loonie’s performance against the greenback is the US dollar’s appeal during market downturns, Osborne said, as it acts as a “safe haven.”

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“During periods of weak stock markets, people tend to flock to the US dollar for refuge and liquidity, so this amplifies the impact on the Canadian dollar,” he said.

However, Monday’s drop may not reflect the longer-term performance of the maniac.

“Most of the time we measure the Canadian dollar by its performance against the US dollar. Perhaps one of the most overlooked aspects of price action this year has been the fact that the Canadian dollar has been among the better performers overall among major currencies, at least year-to-date,” Osborne said.

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