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Loonie to advance toward pre-COVID levels if stocks, oil keep rising

07/02/2020 | 05:08am

By Fergal Smith

The Canadian dollar is likely to gain over the coming year if a potential economic recovery from the coronavirus crisis boosts stocks and the price of oil, assets closely tracked by the currency, toward pre-pandemic levels, a Reuters poll showed.

Trading at about 1.358 per U.S. dollar, or 73.64 U.S. cents, on Wednesday, the Canadian dollar was expected to be slightly weaker at 1.36 in three months, but to then climb to 1.33 in a year. That would be a gain of around 2.06% and stronger than the 1.35 forecast in the June poll.

The outlook for the Canadian dollar "is grounded in a continued recovery in oil prices, number one, and risk appetite, number two," said Greg Anderson, global head of foreign exchange strategy at BMO Capital Markets in New York. "If markets normalize, then USD-CAD should drift back to pre-COVID levels."

Supported by economic stimulus, the S&P 500 posted its biggest quarterly percentage gain in more than two decades in the second quarter, while oil rallied more than 90% and the Canadian dollar was up 3.6%, its biggest advance since the third quarter of 2017.

The 3-month rolling correlation between the Canadian dollar and the S&P 500 has climbed to about 0.9 from less than 0.1 in February, according to Refinitiv Eikon data, indicating the currency and stock market index move mostly in the same direction.

In January, the loonie was trading around 1.31 before the spreading of the coronavirus outbreak began to weigh on financial markets.

To support market functioning and Canada's economy, the Bank of Canada has since March slashed its benchmark interest rate to a record low of 0.25% and begun a large-scale asset purchase program, quantitative easing, for the first time.

Canada's central bank and the U.S. Federal Reserve are likely to keep interest rates at near zero for the next couple of years almost regardless of economic data, Anderson explained, so Canadian dollar investors need "to look at something else for direction and something else is probably just the normalization of other financial markets."

Data on Tuesday showing a record 11.6% decline in Canada's GDP in April had little impact on the loonie.

(Reporting by Fergal Smith; Polling by Hari Kishan and Sumanto Mondal; Editing by Ross Finley and Andrea Ricci)

© Reuters 2021
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