By Susanne Barton
“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.
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.