Loonie rally washed out by U.S. dollar haven appetite

Canada’s dollar is on a stubborn path weaker even as policy makers prepare to embark on their first monetary tightening cycle in almost five years.

Canada’s dollar is on a stubborn path weaker even as policy makers prepare to embark on their first monetary tightening cycle in almost five years. 

Traders in the options markets are becoming increasingly bearish on the loonie, a surprising development when nearly all of the currency’s typical drivers would suggest outperformance. Crude prices are up 35 per cent in the first two months of the year, while nearly every economist surveyed by Bloomberg expects the Bank of Canada to boost interest rates by 25 basis points on Wednesday. The prospect of a current account surplus should also be a boon. 

It’s still not enough for the loonie, which has struggled alongside most of its Group-of-10 peers amid an uptick in demand for haven currencies. Russia’s invasion of Ukraine has stoked lackluster performance in equities and pushed traders toward the safety of the U.S. dollar. That’s hitting its neighbor to the north even as Canadian benchmark rates are set to rise, according to Christian Lawrence, a strategist at Rabobank in New York. 

“I don’t really see anything domestically that’s likely to outweigh the impact of the safe-haven bid for the U.S. dollar and the oil story for the Canadian dollar,” he said. “In the short-term, I think the safe-haven bid wins out.”

The loonie is down about 0.9 per cent versus the U.S. dollar this year, mostly trading in a range between 1.2670 and 1.2800 since late January when Bank of Canada officials all but signaled their intention to start increasing rates in March.