We have been bearish on the loonie since the beginning of the year, and especially since the beginning of the crisis. That view has been borne out as the Canadian dollar has lost roughly 9% of its value against the US currency year-to-date. It is time to now review that position.
We have been describing the situation as follows:
“The Canadian dollar has been hit with a 1-2-3-4 punch so far this year:
- Soaring demand for the dollar is sending almost all other currencies tumbling and pressuring companies and investors that need the U.S. currency to pay off debts and meet other obligations. That has meant a huge increase in the value of the US dollar against nearly all major currencies, including the Canadian dollar.
- With that backdrop of a soaring greenback, the loonie has faced a unique additional challenge; the oil price crash resulting from the OPEC/Russia disagreement has hammered all petroleum exporting currencies like the Canadian dollar.
- The closure of the border and the overall drop in global trade flows is deemed to be especially negative for small open economies like Canada.
- Finally, a general environment of repricing risk down has been unfavorable to currencies like the Canadian dollar.”
We are potentially seeing some bottoming in each of those conditions:
- The Coronavirus has a long way to go before we can feel safe shaking hands but we are beginning to see the scope of the problem. We can see worst-case outcomes manifested in places like Italy, Iran, and Spain. The results of tragic but in those countries, we are beginning to see a decline in the growth of cases. Other countries are at different stages but if those countries are the worst-case outcomes, the world will not look materially different after the crisis than it did before.
- We can also be cautiously optimistic about the current circumstances in Canada where we have not seen exponential growth in the number of cases despite a reasonable number of testing. We can be especially optimistic on a relative basis to the US where the scope of the problem remains unclear. That suggests that the Fed may have to continue to be aggressive relative to the measures introduced by the Bank of Canada.
- Oil is now trading at historic lows. None of the major players are inclined to keep prices this low for much longer. The Saudis are especially likely to be responsive from US pressure which has started to emanate from oil-producing regions like Texas. The Russians and the Saudis are obviously harmed in the short term by these prices and almost all of OPEC is unhappy with current circumstances as well. While the precipitous fall in demand and the shocking increase in supply will continue to hold down oil prices, at this point the risks for oil are more to the upside than the downside.
- The soaring overseas demand for US dollars has been partially addressed by the Fed’s opening of additional lines to other central banks. While overseas USD liquidity will continue to be an issue, at the very least the technical issues have been addressed between central banks.