Nayaz G

The Canadian dollar reached a four-week high against the USD earlier this week, after touching 1.3572. Investors seem to be of the view that the worst-case scenario of a global banking sector meltdown is now less likely, and that the banking crisis has been contained. This has resulted in a more upbeat market outlook, led by a resurgence in technology stocks. All this has helped propel oil prices higher, which, in turn, has allowed the Canadian dollar to stabilize at these new higher levels against the US dollar. The USD/CAD is currently trading at 1.3538 (CAD/USD 0.73866).

Rapidly changing market sentiment continues to be the primary driver for the exchange rate between the US and Canadian dollars, causing the Canadian dollar to oscillate. On Friday, concerns about the European banking sector, particularly Deutsche Bank, resulted in a one penny loss for the Canadian dollar, hitting a 9-day low. However, today, the markets have shown signs of optimism as banking regulators provide more assurances, and some troubled banks’ shares climb in value. As a result, the Canadian dollar has regained most of its losses and is currently trading at 1.3658.

We ended our last post by warning that instability in the banking sector could push the value of the Canadian dollar lower versus the US dollar. Sure enough, overnight in Europe, another banking behemoth, Deutsche Bank, came under pressure with its share prices down close to 15% after a jump in demand by investors for insurance against potential default (credit-swap).

This pushed investors and global sentiment into risk aversion mode and helped increase the value of the US dollar against the Canadian dollar. The Canadian dollar has lost about ¾ of a cent and is currently trading at 1.3781, which is a two-week low against the US dollar. We see this as a good opportunity to sell US dollars for frequent US dollar sellers.

After a dizzying week of bank failures and unprecedented interventions, investors and central bankers around the world are left with more questions than answers about what all this means for the global economic outlook and the direction of the Canadian dollar versus the US dollar.

Are we dealing with a regional US banking crisis or is this growing into a global banking crisis? Have the regulators done enough to contain consumer fears, or will the run on the banks continue? How will all this impact the Federal Reserve rate-hiking cycle? What does this mean for the USD/CAD exchange rate?

Globally, markets have been quick to reduce rate-hike expectations. However, what the Federal Reserve decides to do remains highly uncertain. With the Fed now stuck between a rock and a hard place, or more accurately, stuck between confronting inflation or quelling the banking crisis, you can make an argument for an interest rate increase just as easily as you can for a pause in interest rate hikes.

From a Canadian perspective, despite commodity prices slumping and gloomy global economic sentiment, the Canadian dollar came back from multi-month lows and managed to hold on to some of its gains. USD to CAD is currently at 1.3756 (CAD to USD is at 0.72694). This surprising resilience in the USD/CAD price is most likely a result of the BoC decision to keep rates unchanged.

What was initially thought to be a regional banking crisis in the US has now expanded globally. On Wednesday, Credit Suisse, a bank that has been around for over a century, experienced a 24% drop in stock prices due to the fear of a potential default. Credit Suisse is Switzerland’s second-largest bank, following UBS Group AG, and is a significant player in international financial markets, with operations across Europe, Asia, and a substantial US business.

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