A Shift in Forces Driving the Loonie
The traditional forces driving the Canadian dollar, such as oil and the Bank of Canada’s monetary policy, are no longer the dominant factors influencing its value. The emergence of global equities as a key driver has significant implications for traders and policymakers.
Global Equities: A New Catalyst for the Canadian Dollar
The one-year rolling correlation between the Canadian dollar (CAD) and world equities is stronger than its relationship with base metals, crude oil, and yield differentials. This means that strategists may need to revise their models to better reflect global risk appetite.
RBC’s Insights
According to George Davis, a strategist at RBC, investors view the world from a "risk on/risk off" perspective. They use equity markets as their primary proxy for risk sentiment. As such, the significant recovery in equities since late March has been accompanied by CAD appreciation. The Bank of Canada’s (BOC) monetary policy is no longer the dominant factor driving the loonie.
Impact of U.S. Politics on Global Risk Sentiment
The Canadian dollar’s fate is increasingly tied to broader risk sentiment, with all eyes focused on the U.S. as the White House and Congressional leaders battle over a new round of fiscal stimulus that could fuel more demand for riskier assets. The opinion polls suggesting former Vice President Joe Biden’s likely victory in the November 3 election could tip the balance toward more government spending.
Quotes from Market Experts
- "If your belief is that there’s a Biden victory in the cards and is positive for equities, be long loonie." – John Velis, FX & macro Americas strategist at BNY Mellon
- "What happens to the USD is what happens to CAD, and what happens to the USD is what happens with the equity market, which is itself a function of policy and political risk." – John Velis, FX & macro Americas strategist at BNY Mellon
Technical Analysis: Dollar-Loonie Pair
The dollar-loonie pair has been consolidating for nearly two months after falling from a year-to-date high of 1.4668. The pair remains below a descending trendline, currently 1.3280, where a close above that line would likely point to further gains.
Conclusion
The Canadian dollar is at the mercy of global risk sentiment at the moment, with its value influenced by broader market trends rather than traditional factors such as oil and monetary policy. As the world watches the U.S. elections and stimulus talks, investors should be prepared for potential volatility in the loonie’s value.
Sources
- RBC
- BNY Mellon
- Monex Europe and Monex Canada
