Lagging loonie unlikely to get a boost from rate hikes as greenback stays strong

FILE PHOTO: A Canadian dollar coin, commonly known as the

The lagging loonie isn’t likely to get a boost from the 75-basis-point interest rate hike announced Wednesday by the Bank of Canada — at least not relative to the runaway greenback. 

While analysts say the Canadian dollar has been one of the strongest performing major currencies in the world this year, it has been no match for the resilient U.S dollar, to which it has been losing ground for months. 

Even the uptick the loonie enjoyed Wednesday was more reflective of a broader softening in the U.S. dollar, Scotiabank’s chief foreign exchange strategist, Shaun Osborne, said in an interview. 

“The Canadian dollar at the moment can’t really move or hasn’t really reflected a lot of the positive underlying fundamentals that we have in Canada, (such as) relatively strong growth, relatively high interest rates,” Osborne said. 

He also noted that when the Bank of Canada raised 100 basis points last month, the Canadian dollar actually fell. 

“The Canadian dollar is actually one of the better performing currencies amongst the majors but it hasn’t really been able to penetrate the very resilient U.S. dollar,” he said. 

It seems traders are more fixated on the U.S. interest-rate outlook instead. 

The potential for the U.S. Federal Reserve to hike more than projected is also dulling the benefits to the loonie of a more hawkish Bank of Canada, CIBC World Markets Inc.’s chief economist Avery Shenfeld said in a note to clients. 

“We still judge it as unlikely that the peak overnight rate in Canada will end up exceeding that of the U.S.,” he said. 

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The loonie was trading at just over US$0.76 in Wednesday afternoon trading, down about 3.75 per cent from January.

The loonie hasn’t kept pace with the U.S. dollar’s mighty run this year, but compare to the Euro and other major currencies, the story has been different. 

Over the past year, the Canadian dollar has gained 14.55 per cent against the Euro — largely because of eurozone weakness due to Russia’s invasion of Ukraine and the ensuing energy crisis and high inflation — and is now trading at levels not seen in nearly/more than a decade. 

Jay Zhao-Murray, a market analyst for commercial foreign exchange specialist Monex Canada Inc., said even though the loonie has depreciated against the U.S. dollar this year, it’s actually the best-performing G10 currency when compared to the greenback, supported by improving terms of trade as Canada is a net commodity exporter. 

“We’re expecting to see CAD rally once global recession risk abates and investor risk appetite returns, but until then, our base case is for the Canadian dollar to keep trading at depressed levels against the U.S. dollar,” Zhao-Murray said.

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