The Canadian dollar has quickly rebounded from the dip experienced yesterday due to the shock miss in second quarter GDP. USD to CAD is currently at 1.260 (CAD to USD at 0.794), which is roughly the middle of the range of where the loonie has been trading since late July. The markets are starting September on an optimistic note with a preference for risky assets like the Canadian currency. Stocks, which ended August up for the 7th month in a row, are up again this morning. Oil, Canada’s major export, is up slightly, providing a tailwind to the Canadian dollar. The relative speed at which the Bank of Canada and the US Federal Reserve are perceived to be moving to raise rates is going to be a key driver of the exchange rate between the Canadian currency and the US dollar. Last Friday, the Fed indicated that tapering of asset purchases could begin this year, but that it is in no hurry to raise interest rates. Meanwhile the Bank of Canada started adjusting its asset purchases in April but signaled that a rate hike was not in the cards well into 2022. One of the many factors that the Bank of Canada is likely considering in advance of next week’s announcement is that the poor Q2 GDP performance was significantly related to a decline in exports. A weaker Canadian dollar (and therefore a pushing back of expectations about raising rates) would help with that issue.
