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‘Tread carefully’: Canadian dollar slides, crosses line in the sand as currency market gyrates

Briefing highlights

  • Canadian dollar below 75.5 cents
  • Markets at a glance
  • A B.C. protest I’d love to see
  • U.S. housing starts near 11-year high

Canadian dollar sinks

The Canadian dollar is slumping against its U.S. counterpart this morning, driven lower by a greenback that’s rising amid gyrations in the currency market.

The loonie slipped to below 75.5 US cents, continuing a decline sparked by several developments, including mounting trade fears and policy differences between the Bank of Canada and the Federal Reserve.

Today, however, it’s all about the U.S. dollar, which rose against most major currencies but for Japan’s yen and the Swiss franc after President Donald Trump’s latest salvo in America’s trade spat with China.

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There’s more going on, though.

“Our traders have been of the view this morning that trade has just been an excuse [to buy the U.S. dollar],” said Elsa Lignos, Royal Bank of Canada’s global head of foreign exchange strategy in London.

At Mr. Trump’s direction, U.S. trade officials are now studying the possibility of additional tariffs on US$200-billion in imports from China.

But Ms. Lignos pointed out in an interview that this is a legal process that takes some time.

CIBC World Markets, meanwhile, is advising investors to “tread carefully” where the Canadian dollar is concerned.

Bipan Rai, the bank’s North America head of foreign exchange strategy, said before the latest developments that the loonie’s slide is the result of global trade fears and speculation that Russia and the Organization of the Petroleum Exporting Countries will decide Friday to ease their production quotes and boost supply, which could mean lower crude prices.

“For the former, tariffs lobbied between the U.S. and China, or the U.S. and Canada (more directly) have the effect of potentially impinging on global demand,” Mr. Rai said.

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“At the very least, markets will hit bids on currency proxies leveraged to demand and commodities (including the CAD),” he added, referring to the Canadian dollar by its symbol.

Another “compelling reason” for caution relates to higher global bond yields, he said.

Mr. Rai believes the currency could test about 75 US cents in the weeks ahead, and 74 over the next few months.

“An overvalued trade-weighted USD is a risk to that view – so tread carefully,” he added, meaning the U.S. dollar could turn tail.

There’s something akin to a line in the sand here, too, as the loonie has now slipped below year-earlier levels for the first time in also a year, noted Bank of Montreal chief economist Douglas Porter.

“The most recent turn has been driven by a generalized move away from risk assets, due to growing concerns over trade worries,” Mr. Porter said late Monday.

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“Perhaps the only question can be: What took so long?” he added.

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Investors are running scared, and buyers will be scarce until tensions cool

— CMC Markets analyst David Madden

Markets at a glance

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A B.C. protest I’d love to see

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