High-flying loonie starting to lose its wings

The loonie is starting to lose its wings, tumbling to a twoand-a-half month low, largely fuelled by the June outlook from the U.S. Federal Reserve and — to a lesser degree — falling oil prices.

The Canadian dollar dropped to 80 cents against the greenback last week, the lowest it has been since late April. Surging demand for commodities such as lumber, along with the Bank of Canada’s hawkish tone, sent the loonie to a high of 83 cents in mid-May — its highest rate since 2015.

But now it’s beginning to reverse path amid shifting global financial policies.

An uncertain Fed outlook is weighing down global currencies relative to the U.S. dollar since the central banks’s latest interest rate decision on June 16.

Some Fed members said they believe the conditions needed to stem the bank’s asset purchases will come sooner than expected.

Karl Schamotta, chief market strategist at Cambridge Global Payments, told Postmedia News the Fed has effectively signalled that policymakers won’t let the economy overheat and inflation run rampant with loose policy.

“The broader theme here is that you are seeing that risk aversion driving funds back to the dollar today, but the broader theme for the last couple of weeks has been the idea that inflation is not about to get out of control,” Schamotta said.

“The Fed is ready and willing to tighten policy if needed, in order to stall any heating and overheating in the U.S. economy.”

Schamotta added that what we’re seeing in the currency markets right now plays into the “dollar smile” theory, which states that the U.S. dollar is expected to strengthen both because of a booming economy and a significantly weaker economy, as risk aversion sets in and pushes investors into stable currencies.