Posthaste: Outlook for Canadian dollar darkens in world of risks

financialpost.com:

So what’s up with the Canadian dollar?

While many thought the currency would strengthen in 2023, the loonie has slid to depths not seen since the height of the pandemic. (This morning it was trading near a 6-month low of 72.43 US cents)

A big part of this mystery is that the drivers of the currency have changed. When a hawkish Bank of Canada was raising interest rates it supported the loonie, but now that the slowing economy has reduced the risk of more hikes, new drivers are taking over.

“The loonie has never met a crisis it didn’t want to join,” writes BMO chief economist Douglas Porter in a recent note.

Geopolitical turmoil is a big one. The outbreak of war in the Middle East has dampened global risk appetite, hitting currencies like Canada’s hard.

If that situation deteriorates, the loonie could drop as low as 71.4 US cents, say analysts with Monex Canada.

Then there is the global bond meltdown. Porter says a side effect of the rise in long-term Treasury yields is a rebound in the U.S. dollar, “a secondary pain trade which has of course skewered almost all other currencies.”

Another weight on the loonie is the rather surprising gap between the Canadian and American economies. Porter said normally there isn’t that much difference between the GDP growth rates of the two countries because of Canada’s economic dependence on its southern neighbour.

Yet in the third quarter U.S. GDP hit an eye-popping 4.9 per cent annual rate, while Canada, according to early estimates, dipped slightly into contraction.

“As Canada stagnates and faces a looming recession, the U.S. economy looks set to strengthen further from an already-solid pace of growth,” said Monex Canada FX market analysts Jay Zhao-Murray and Simon Harvey.

In the 30