Risk-on, risk-off: a look at what's driving the loonie's return to seventy-five cents

The Canadian dollar trended higher through the summer and has returned to the range that a lot of analysts thought it would hover around for the bulk of the year prior to the arrival of the COVID-19 pandemic.

While it’s declined slightly since the start of September, the loonie is back to trading around US$0.75 after dropping below US$0.69 in mid-March when COVID restrictions were put in place.

“When you look at the Canadian dollar, there’s lots of moving factors to it,” says Matthew Pot, from Grain Perspectives. “When you think about the beginning of the year, the Canadian dollar, and at the same time U.S. equities are around that same mark, more or less, compared to the March decline.”

Risk-on and risk-off reactions seem to be the dollar’s biggest influence, and if you follow the U.S. equities, or the S & P closing values, and compare them to the dollar, you’ll find an 87 per cent correlation between the two, says Pot.

That’s a stronger correlation than with other factors, including crude oil. (Story continues below player)

Where the U.S. dollar is headed is a question mark at the moment, but Pot says that looking at the CAD over the USD, and the fluctuations back to March, the CAD is going to respond to the broad risk of the global economy. Some of the factors that impact the USD and the CAD are the same, so the focus should be on what’s unique to each market.

“Right now, and this has been the case since March in my opinion, you really have to look at the U.S. dollar,” says Pot. “In the short term, when you look at the Canadian dollar, you’re going to look at the risk-on, risk-off sentiment, and for the most part, if equities fall, the Canadian dollar’s just going to lose some value and if they all of a sudden rebound again, the Canadian dollar is going to rebound.”

As always, the U.S. Federal Reserve’s decisions, the amount of money that’s being added to the supply, and the size of the balance sheet are all factors for the U.S. dollar. The U.S. election on November 3 and ongoing trade issues could also have impact the U.S. dollar value, but Pot says the effects are unclear at this point.

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