Canadian dollar’s resilience at risk as central bankers meet

The Canadian dollar's outperformance has shown signs of waning as the loonie has failed to catch up with the rebound across developed-nation peers. Photo by Peter J. Thompson/National Post

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Tim Baker, Deutsche Bank’s head of foreign-exchange research for the Americas, is among those on Wall Street who is taking a more negative view on the loonie ahead of Wednesday’s Bank of Canada meeting. While the central bank is expected to hold its key rate steady, Baker says officials’ tone could be enough to pressure the currency.

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“They could shift to sound more concerned about a lack of growth,” he said. “That would pave the ground for a material dovish repricing in interest rates relative to Group-of-10 peers, dragging the Canadian dollar down.”

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The loonie’s relative resilience compared to Group-of-10 peers, seen in the days after the United States attacked Iran and energy prices soared, is already starting to fade. Its outperformance has shown signs of waning as the loonie has failed to catch up with the rebound across developed-nation peers.

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The Canadian dollar is little changed against its U.S. counterpart this week around 1.37. This month, it’s down about 0.4 per cent against the U.S. currency.

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The Bank of Canada is widely expected by market participants and economists to keep the policy rate at 2.25 per cent on Wednesday. Beyond that, traders in the swap market are still pricing in about 25 basis points worth of rate increases by the end of the year. At the end of February, they’d seen about 30 per cent chance of a quarter-point cut in that same period.

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“Rates are likely on hold, rhetoric cautious, and markets may be over‑pricing the probability of hikes unless oil prices stay elevated for longer,” said Mark McCormick, chief FX strategist at BMO Capital Markets based in Toronto. “None of this bodes well for the Canadian dollar.”

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Data released Friday showed the Canadian economy lost the most jobs in more than four years last month, driving up the unemployment rate to 6.7 per cent. While inflation slowed more than expected last month, focus has shifted to the risk of a resurgence globally as conflict continues in the Middle East, keeping energy prices elevated.

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Deutsche Bank’s Baker prefers selling the Canadian dollar against its U.S. and Australian peers. He also thinks the loonie could slide suddenly against the euro if tensions surrounding Iran fade.

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Still, there’s some who see the loonie as well positioned if a longer-term conflict leads to a protracted disruption to energy markets. The Canadian dollar could strengthen against the currencies of countries like Japan and India that rely heavily on imported oil and gas, and have weaker fiscal backdrops, according to Elias Haddad, global head of markets strategy at Brown Brothers Harriman.

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But others are measuring the risks. Bipan Rai, a managing director at BMO Asset Management in Toronto, said pricing of a hike by the end of the year appears at odds with the recent data and risks. Morgan Stanley’s Molly Nickolin and Andrew Watrous wrote in a Tuesday note that the loonie could slide against the dollar if investors turn more neutral in the rates market.