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No Respite Seen for Loonie With Oil War, Pandemic Raging On

By Susanne Barton

Bad news for the Canadian dollar is piling up with strategists seeing no end in sight.The loonie fell to a four-year low versus the dollar Thursday after posting it’s biggest one-day drop in a decade earlier this week. Volatility in the currency pair climbed to the highest level since 2011. TD Securities says the price swings should continue amid the uncertainty of the coronavirus outbreak and now that Saudi Arabia and Russia are in an all-out output war that’s collapsed oil prices.

“The coronavirus outbreak plus the new oil shock throws a monkey wrench into the high-beta complex, especially the commodity exporters,” said Mark McCormick, global head of FX strategy at TD. Good news for oil “doesn’t help too much while bad news has a larger, negative impact,” on the Canadian dollar, he said.

Credit Suisse said the battle over crude represents a “structural change” for the Canadian dollar and may force the Bank of Canada to consider further monetary policy moves, putting more pressure on the loonie.

Traders are already pricing in another rate cut from Canada’s central bank in April, following its 50 basis point cut, as it tries to counter the potential impact from Covid-19. The economic concern also prompted Prime Minister Justin Trudeau to announce a C$1.1 billion ($800 million) stimulus package Wednesday.

But the fiscal and monetary stimulus may not be enough.

Elsa Lignos, global head of FX strategy at RBC Capital Markets, said there’s a lot more to be done before the loonie’s weakness ebbs. On the fiscal side, Trudeau’s stimulus package is “tiny for now” and leaves “more work to be done by monetary policy,” she said Wednesday.

Loonie sinks as oil tumbles on supply outlook

In a separate report published Thursday, Lignos said the market will be watching the upcoming federal budget at the end of this month for any additional measures. Officials in Canada’s finance department are reworking budget forecasts to reflect a quickly deteriorating economic outlook with less than three weeks to go before Finance Minister Bill Morneau delivers his fiscal plan, according to people familiar with the situation.

RBC said there’s still room for the loonie to weaken amid forecasts for an extended period of lower oil prices.

Saudi Arabia escalated the oil-price war with Russia on Tuesday when it moved to flood the market with crude, a day after the industry suffered its deepest rout since 1991. Canada generates about 9% of its gross domestic product from energy, and falling oil prices could threaten the existence of some of its drillers.

The oil collapse represents “a new major complication for the already battered Canadian energy sector,” which could weaken the loonie to 1.4 per dollar, Credit Suisse strategist Alvise Marino wrote in a note to clients Wednesday. Investors should therefore “buy dips” below 1.36 in the currency pair, he said.

The Canadian dollar fell 0.3% to trade at 1.382 per dollar as of 8:17 a.m. in New York, the weakest since February 2016. That weakness has caused its two-year yield gap differential with the U.S. dollar to narrow, also reducing its appeal.

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