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  • How Canadian dollar fares when VIX spikes
  • Markets at a glance
  • BCE profit falls on higher expenses
  • Twitter posts first profit
  • Thomson Reuters posts stronger revenue
  • Telus posts stronger quarterly profit
  • MEG to sell assets for $1.6-billion
  • Suncor raises its dividend

'Volatility shocks'

Here's something to remember if the value of the Canadian dollar is going to affect you or your business over the next little while: The loonie tends to be among "the worst performing currencies following a volatility shock."

The loonie's certainly not alone, but a JPMorgan Chase study of major currencies during six periods of "equity market stress" since 2000 should be required reading for what may lie ahead over the next several weeks.

JPMorgan currency strategist Paul Meggyesi looked at what happened during spikes in the Chicago Board Options Exchange Volatility Index, which is commonly known as the VIX for its ticker symbol, and is a measure of how volatile investors expect the market to be in the short term.

And thus it's also often called the "fear index," which began to spike late last week as stock markets tanked, kicking off a hectic few days.

And today, the loonie is below 79.5 US cents.

Here's what Mr. Meggyesi found, the symbols representing the U.S. dollar, euro, yen, Swiss franc, Australian dollar, British pound, Swedish krona, Norwegian krone, Canadian and New Zealand dollars.

Average foreign exchange performance in the weeks and months following a spike in VIX



Foreign exchange performance is per cent change vs. USD, apart from USD which is per cent change in USD effective exchange rate

"USD and JPY are the two currencies that respond most favourably to spikes in equity volatility," Mr. Meggyesi said in his report.

"Over a two-week period the yen is the best performer, appreciating by an average of 0.9 per cent versus USD, whereas on a one-month horizon the USD index is the best performer at [1 per cent]."

The U.S. dollar index climbed over a one-month period in five of the six bouts of volatility measured, and the yen four times in six.

"The worst performing currencies following a volaility shock are AUD, NZD and CAD, with one-month losses averaging 3.9 per cent, 2 per cent and 1.7 per cent, respectively," Mr. Meggyesi said.

"AUD has weakened in five of the six volatility events, NZD and CAD both four."

And, as the table shows, the loonie was the worst, with a loss of 3.9 per cent, three months out.

Remember, too, that stock markets are still mixed, and it's anybody's guess as to where we go from here. Observers have warned that, while it all certainly appears more stable now, there could be more to come amid the recent turmoil, which was sparked by fears that inflationary pressure will prompt the Federal Reserve to raise interest rates three or four times this year.

"We think that it is too soon to sound the all-clear," said John Higgins, chief markets economist at Capital Economics.

"Our expectation is that unbridled optimism will give way to growing pessimism, as it becomes clear that the U.S. economy will slow in response to tighter Fed policy and fading fiscal stimulus," he added.

The loonie has tumbled from about 81.5 US cents last week, as the U.S. dollar gained.

"This might suggest that the [U.S.] dollar has benefitted from safe-haven flows, despite the fact that developments in the U.S. itself appeared to trigger the slump in global equity markets," said Capital Economics markets economist Oliver Jones.

"Indeed, the dollar has even strengthened a touch against the Japanese yen and Swiss franc, both of which are traditionally regarded as safe havens. And as equities have staged a small recovery, the dollar's initial gains against a few currencies have begun to unwind."

Mr. Jones doesn't expect that to continue through the year, though Capital Economics does expect global stocks to close out 2018 at lower levels.

"Although it is difficult to say with any certainty, we suspect that the further falls in equities that we are anticipating this year will be fairly gradual," he added. "If we are right, then the sort of panic that appears to have prompted safe-haven flows into the dollar recently seems unlikely to re-emerge."

Some other observers, for the record, still forecast higher equity prices.

"We think CAD has further room to fall before looking cheap against the short-term growth dynamics and some of our other valuation models," said Mark McCormick, North American head of foreign exchange strategy at TD Securities.

In the near term, Mr. McCormick expects the loonie to sink to about 79 cents.

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