U.S. dollar weakening, but loonie weakening even more
The U.S. dollar hasn’t had a good 2017 when compared to other major developed and emerging market currencies, but the loonie isn’t benefiting.
The U.S. dollar index, a measure of the average exchange rate between the greenback and major world currencies, has declined as much as four per cent this year.
The loonie, meanwhile, has fallen to US74.5 cents from more than US76 cents in early February, continuing a downward trend from its recent peak of almost US80 cents in May 2016.
Much of the weakness in the American currency appears to stem from concerns that the Federal Reserve may not pursue interest rate hikes at quite the pace the market had hoped for.
A more optimistic tone from the European Central Bank on March 9 also convinced many in the currency market that the Fed won’t be alone in monetary policy tightening.
Politics are also playing a role, particularly given the uncertain trajectory for the new administration in the White House.
“In the United States, the problems Donald Trump is having with fulfilling his promises added to the uncertainty over economic growth,” Hendrix Vachon, a senior economist at Desjardins, said in a recent report.
He believes this took a bite out of rising inflation expectations in the U.S., which came with a pullback in oil prices since the end of February.
The fact that oil prices have returned to the US$50 per barrel range is likely a primary factor behind the Canadian dollar’s weakness, too.
“If crude prices close back in on US$55 a barrel quickly, the loonie could soon return to February’s levels,” Vachon said. “However, we remain pessimistic over the longer term as interest rate spreads between Canada and the United States are expected to widen, even if the Canadian economy does well.”
The economist noted that unlike the euro and other European currencies, the Canadian dollar hasn’t benefited from expectations for rising rates.
The Bank of Canada stuck with its cautious tone at its March 1 policy meeting, and lower-than-expected inflation in February has also worked against the loonie.
Vachon also believes concerns about the U.S. economy are weighing on Canada, particularly when it comes to exports.
Tuesday’s release of disappointing trade data for February also raised concerns about Q1 growth for the Canadian economy.
Scotiabank chief FX strategist Shaun Osborne thinks it may signal a broader shift away from positive data surprises evident in recent economic numbers. He suggested market expectations have either become too bullish, or the data is simply coming up short. “We think much of the good economic news may be factored into the Canadian dollar,” Osborne told clients.