The Canadian dollar’s decline against the dollar is partly due to its close relationship with resource and commodity prices, according to a foreign exchange 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 to the lowest point since early November 2020. Shawn Osborne, senior foreign exchange analyst at Scotiabank, said in a note to clients on Monday that the current risk background and US stock market trends also appear to be The most important factors driving the downward performance of the Canadian currency.
“The Canadian dollar is generally treated as a high beta currency. This means that it was a resource-based economy, the Canadian dollar and its correlations with resource prices. [and] “Commodity prices are sensitive to fluctuations in global growth or global growth prospects,” Osborne said in a telephone interview Monday morning.
Osborne said stock market trends are an important gauge of investor sentiment about growth prospects.
“So we saw weak stocks or strong stocks in general had a very important impact on the Canadian dollar,” he said.
On a one-month rolling basis, Osborne said the Canadian dollar was tied about 82 percent Monday morning with US stock markets.
“The risk background, or stock market background, has a very strong influence on [Canadian dollar’s] He said “.
Among the major global currencies, Osborne said that the Canadian dollar is among the currencies most closely correlated with the stock markets.
Monetary policy tightening remains an important factor behind the risk profile in US equity markets.
Osborne said that US interest rates rose rapidly, given “constant inflation numbers”. Amid persistent inflation, Osborne said there is likely to be another sharp rate hike from the US Federal Reserve this week, something that could keep the dollar higher relative to the Canadian currency.
We have seen interest rate differentials move more in favor of the US dollar. On the sidelines, this will keep the US dollar supported as well,” he said, adding that markets expect the Fed to maintain its hawkish stance.
Markets are pricing in another three-quarters of a percentage point increase from the US Federal Reserve later this week.
Another key factor when evaluating the Canadian dollar’s performance against the dollar, Osborne said, is the attractiveness of the US dollar during downturns in the market, as it acts like a “sanctuary currency.”
“In times of stock market weakness, people tend to flock to the US dollar for sanctuary and liquidity, so the impact on the Canadian dollar is somewhat amplified because of that,” he said.
However, Monday’s drop may not reflect the Canadian’s long-term performance.
“Most of the time, we measure the Canadian dollar in terms of its performance against the US dollar. One aspect that may have been overlooked in price action this year is the fact that among the major currencies, the Canadian dollar has been one of the best performing currencies overall, in terms of Overall performance so far, at least.