The loonie is faltering. Here’s why the U.S. Fed might provide a lift

Canadians whitethorn person noticed nan worth of their dollar dwindling ever since nan Bank of Canada’s latest interest rate trim past week.

But it’s a determination from nan U.S. Federal Reserve coming up this week that could person much of a opportunity successful whether nan loonie holds pat for nan remainder of nan summer.

Canada’s dollar is trading astatine a small complete 72 cents compared pinch nan U.S. greenback arsenic of Tuesday. That’s astir half a cent little than it stood a week earlier, conscionable up of nan Bank of Canada’s gathering wherever it trim its benchmark liking rate by different 4th of a percent constituent to 4.5 per cent.

Doug Porter, main economist astatine BMO, said successful a little statement to clients Tuesday greeting that “the Canadian dollar is probing levels it hasn’t seen overmuch successful nan past 20 years.”

He noted that nan loonie’s worth has dropped 1.5 per cent since nan Bank of Canada’s complaint cuts began successful early June. The only caller cases wherever it has fallen little were erstwhile lipid prices took a steep deed successful 2016 and nan early days of nan COVID-19 pandemic successful 2020.

Porter noted that while nan loonie has struggled against nan U.S. dollar for a while now, caller weakness has seen nan Canadian dollar besides lag nan euro, yen and pound.

The Bank of Canada’s easing argumentation rate, arsenic good arsenic a marked alteration successful reside that suggests monetary policymakers are eyeing much cuts successful nan months ahead, is apt a large logic for nan dollar’s weakness.

“No doubt, nan (Bank of Canada’s) very dovish stance is opening to spot distant astatine nan currency,” Porter said, referring to nan hints of further complaint cuts to come.

One cardinal facet that affects nan speech complaint betwixt nan Canadian and U.S. currencies is nan respective argumentation rates from nan economical neighbours’ cardinal banks.

With nan Bank of Canada opening its easing rhythm good up of nan U.S. Fed, investors are discouraged from parking their rate northbound of nan border, driving liking distant from nan loonie.

The little nan Bank of Canada goes without nan U.S. Fed pursuing suit, nan much harm could beryllium done to nan speech rate.

This is an rumor for much than conscionable Canadian visitors trying to agelong their dollar arsenic acold arsenic they tin while they’re vacationing successful nan U.S. this summer.

There are implications for inflation, arsenic well, arsenic a weaker loonie makes U.S. imports much expensive. That’s peculiarly an rumor heading into nan autumn and winter, erstwhile shelves successful Canadian grocers are much often stocked pinch equipment grown successful nan U.S. aliases farther abroad.

Trending Now

Bank of Canada politician Tiff Macklem has acknowledged that location is likely a “limit” to really overmuch monetary argumentation successful nan U.S. and Canada tin diverge, but has played down really intimately nan governing assembly is basing complaint decisions northbound of nan separator connected what’s happening to nan south.

Macklem said astatine a property convention Wednesday that hopes for complaint cuts starting soon successful nan U.S. should dampen nan effect diverging liking rates could person connected nan Canadian dollar.

“With ostentation showing much signs of easing successful nan United States, my consciousness is that divergence is not going to beryllium peculiarly serious,” he said.

Indeed, inflation successful nan U.S. has shown renewed signs of easing arsenic of precocious aft a flare-up to commencement nan twelvemonth pushed backmost expectations for complaint cuts from nan Fed.

While Chair Jerome Powell isn’t expected to present an first liking complaint trim astatine nan upcoming determination connected Wednesday, Porter said successful his statement that a “dovish” reside from nan Fed “could supply support” for nan flagging loonie.

But he added that nan Bank of Canada’s “sanguine” outlook connected nan loonie’s prospects mightiness support nan Canadian dollar “under a cloud” successful nan adjacent term, arsenic nan cardinal slope looks group to present much easing moreover arsenic nan U.S. Fed could beryllium group to embark connected its ain rate-cut cycle.