The CAD Takes a Dive

The Canadian dollar has more recently been hit by wave after wave of turbulence mostly arising from the volatility surrounding oil prices. The Canadian dollar last week reached its least in four months against the US dollar, a significant reason for this fall is the slump in crude oil price. Given that oil is Canada’s major export earner, it ultimately assumes the role of a determinant for the fate of the currency. Another likely cause could be the Canadian monetary policy as rumours hinting at a further decrease in Canada’s interest rates are gaining weight.

A fundamental factor that might have been responsible for the recent soar in the Canadian dollar is the recently released US GDP date, but this idea was challenged last week when the shocking GDP data did not do much for the CAD, but it is also important to note that Canada’s GDP data was almost equally as bad.

Meanwhile, the Canadian dollar came under immense pressure as oil prices began their downward trend on Monday, amidst the growing supply glut fears, the CAD also edged lower against the EUR as we witnessed the EURCAD grow by 0.36% to sit at 1.4614.

“The only reason the Canadian dollar rose at all on the week was because, in the collective wisdom in the market, the disappointing US growth trumped the slightly larger contraction of the Canadian economy in May,” Marc Chandler, global head of currency strategy at Brown Brothers Harriman wrote.

Canada’s growth has truly shown worrying signs in recent times, as their economic report for May showed the economy shrinking by 0.6% month-on-month and growing by a marginal 1.0% annualised. They both had market expectations held at a 0.5% decline and 1.2% expansion respectively. Chandler also believes that overriding the near-term theme of US dollar weakness will result in more decline for the USDCAD.

“The US dollar found support ahead of C$1.30, but the technical tone remains soft and a break could quickly see C$1.2950, but reasonable support may lie closer to C$1.2860,” Chandler also wrote.  On the bright side, he sees C$1.3100 as the first hurdle.

With the market’s expectation of a rate hike by the US Fed on a very high note, the chance of a Fed funds target raise has been significantly reduced to a 1 out of 3 chance against its previous 2 out of 3.

However, Chandler also warns that, “If you think that there is no chance of a September hike (doubts about economic strength) or a November hike (too close to the election), then the odds of a December hike may still be close to 60%,”

Canada’s relative interest rate position still looks fragile as no one is currently betting on a Canadian hike in the near future.