The Canadian dollar is down a modest 0.1% this morning as attention is focused on stock markets where technology stocks are continuing a sell-off that started yesterday and accelerated into the close. The move down in tech stocks is being attributed to money rotating towards sectors that are more exposed to the so called “reflation” trade (essentially, a normalization of the economy benefitting cyclical stocks) as well as fears of rising inflation. And that is where it gets interesting for the USD to CAD exchange rate. Reflation (economic recovery benefitting cyclicals, and possibly commodities) is generally a positive for the Canadian dollar. But inflation will likely be a net negative for the Loonie as it will be perceived as pressuring the US Federal Reserve to move more quickly to rein in monetary stimulus. We are very far from the Fed responding to inflation fears but Wednesday’s inflation figures in the US will be watched closely. As for today, if the stock sell-off continues, you can expect some further modest and short term weakness in the Loonie. Over the medium term, the Canadian dollar has come a long way over the few weeks (up nearly 4%). That move has been rational given that the Bank of Canada has taken a relatively hawkish stance and that oil prices have been trading up. For now, those conditions continue to persist but certainly there are some risks, as today’s market action shows.
