Will the Bank of Canada follow the Federal Reserve?
The Canadian Dollar has been on a roller coaster this year, and the month of July was no exception. From the month open, to month close, the Loonie weakened by almost 5 cents, touching new multi-year lows that we have not seen since 2004. The decline was driven by a combination of developments, as global economic concerns weighed on sentiment and commodity prices. The economic outlook for Canada continues to be impacted by energy prices and the potential for a prolonged global economic slowdown weighs heavy on Canada.
Economic uncertainty is never good for currency exchange rates. The Bank of Canada’s rate cut on July 15th and a shift to a dovish stance has introduced greater downside risk to the Loonie while leaving it increasingly vulnerable to oil price movement. Oil prices continue to be the greatest near term risk for the Canadian Dollar.
The dovish stance from the Bank of Canada presents further near term vulnerability, one that is likely to support further CAD weakness as the Federal Reserve looks to raise rates as early as September. On top of this, CAD technical data is overwhelmingly bearish with most major analysts anticipating further Canadian dollar weakness as we close out 2015. Hedging against foreign exchange loss for the remainder of the year should be a serious consideration for Canadian businesses.