In amongst the turmoil in the UK bond and currency markets it is getting harder to find a good safe haven buy, but among the currencies the Canadian dollar is holding fairly well.
The currency is closely linked to the oil price and is benefiting from this week’s nearly 4% gain in oil prices after OPEC said that it is considering cutting oil production by 1 million barrels to stem the decline in oil prices.
USD/CAD
Though the Loonie has declined against the US dollar in September as the outlook for the Canadian economy worsened, the Canadian currency has held up fairly well against the dollar compared with other currencies such as yen or sterling. As the greenback goes from strength to strength and the Fed keeps tightening its rates fairly aggressively, major currencies keep losing ground. However, though the Loonie has weakened, only the Swiss Franc has performed better against the greenback this year.
With the Fed firmly on a tightening path the Loonie will remain in the passenger seat; eventually the dollar will run out of steam and when it does the Canadian dollar will be well positioned for a rally against the greenback. The Loonie offers one of the highest interest rates among major currencies as the Bank of Canada has kept pace with the Fed’s rate increases, currently at 3.25%.
[ad]GBP/CAD
The Canadian dollar has been strengthening against the pound throughout this year with the rally culminating after the contentious UK mini budget. By the end of the last week the rate had already normalised a bit and the retracement continued this morning after the UK Prime Minister backpedalled on one of her tax proposals. But with the Canadian interest rates remaining above UK levels the Loonie is set to keep its strong position against the pound.
While there were expectations last week that the Bank of England would opt for an emergency rate hike in the wake of the mini budget now it seems more likely that the BoE will ride it out until the Monetary Policy Committee meeting on 3 November and then opt for a bigger hike.
So far this year the Bank of Canada has raised rates five times, the latest a 0.75% in September, bringing them up to 3.25%, and further rate increases are expected before the end of the year. The OECD expects Canadian rates to rise to 4.5% by next year. This makes the UK’s 2.25% rate look conservative, although there is now talk of a 75 basis points or even 100 basis points rise in November from the BoE.
CAD/JPY
The Loonie/yen pair had a strong performance throughout most of this year as the BoC tightened rates while the BoJ held back despite Japanese inflation reaching its highest level in over 30 years. The BoJ has kept Japan’s short-term interest rate at -0.1% with 10-year bond yields at 0% despite inflation levels of between 2.5% and 3%. Economic pressures are being exacerbated by high commodity prices and the fact that other major economies are raising their interest rates, which may eventually force the BoJ’s hand, but there is no indication yet on when this might happen. For the moment the CAD/JPY is at its strongest since 2008.
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