Thursday saw the Canadian dollar fall to a four-year low versus the dollar after posting its largest one-day drop in a decade earlier this week. Volatility in the currency pair also climbed to the highest levels since 2011. TD Securities noted that the price swings should continue amid the uncertainty of the coronavirus outbreak and now that Saudi Arabia and Russia are competing in an oil output war, that’s collapsed oil prices, putting further pressure on the Canadian dollar, allowing the pound to edge higher.
CAD drops as oil price shocks the currency
Mark McCormick at TD noted yesterday that “the coronavirus outbreak plus the new oil shock throws a monkey wrench into the high-beta complex, especially the commodity exporters”. Positive news for oil “doesn’t help too much while bad news has a larger, negative impact,” on the Canadian dollar, he highlighted. Credit Suisse mentioned the price of oil and said the battle over crude represents a “structural change” for the Canadian dollar and may force the Bank of Canada (BoC) to consider further monetary policy moves, putting more pressure on the Canadian currency.
Investors are already pricing in another rate cut from the Bank of Canada in the upcoming months, following its recent 50bps cut, as it tries to counter the impact from the coronavirus. The economic concern also prompted the Canadian Prime Minister Justin Trudeau to announce a C$1.1 billion ($800 million) stimulus package on Wednesday. But the fiscal and monetary stimulus may not be enough.
Stimulus may not be enough for CAD boost
Speaking about the Canadian government’s recent moves, Elsa Lignos, global head of FX strategy at RBC Capital Markets, said there’s a lot more to be done. On the fiscal side, Trudeau’s stimulus package is “tiny for now” and leaves “more work to be done by monetary policy,” she said on Wednesday.
In a separate report published on Thursday, Lignos highlighted that the market will be watching the upcoming federal budget at months end for any additional measures. Officials in Canada’s finance department are reworking budget predictions to reflect a quickly deteriorating economic outlook with less than three weeks to go before Finance Minister Bill Morneau delivers his fiscal plan.
Oil prices keep downward pressure on CAD
Saudi Arabia escalated the oil-price war with Russia on Tuesday when it moved to flood the market with crude, a day after the industry suffered its deepest rout since 1991. Canada generates about 9% of its gross domestic product from energy and falling oil prices could threaten the existence of some of its drillers. With the pressure remaining on CAD as the oil feuds continue, the pound sterling could creep its way up against the struggling ‘Loonie’.
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