**Canadian Dollar Weakens Amid Risk-Off Sentiment and Falling Oil Prices**
_By VT Markets Analysts | Original Source: VT Markets (with additional insights from Bloomberg, Reuters, and Scotiabank reports)_
The Canadian dollar recently faced renewed downside pressure as global risk appetite continued to wane, resulting in a stronger U.S. dollar and overall market caution. Analysts from Scotiabank pointed to a combination of macroeconomic factors weighing on the loonie, including softer risk sentiment, declining commodity prices (especially crude oil), and diverging monetary policy expectations between the Bank of Canada (BoC) and the U.S. Federal Reserve.
The USD/CAD currency pair has been trending higher, reflecting investor preference for safer assets amid growing concerns over slowing global growth, geopolitical tensions, and interest rate uncertainties.
Here’s a detailed look at the key drivers behind the Canadian dollar’s recent underperformance and what to expect moving forward.
## 1. Deteriorating Risk Sentiment Boosting the U.S. Dollar
One of the main factors currently driving currency markets is the global shift away from risky assets toward safer havens like the U.S. dollar. This flight to safety has hurt the Canadian dollar, which is usually considered a risk-sensitive currency.
– Global equity markets have turned lower in recent sessions due to rising concerns over global growth slowdown, persistent inflation in some economies, and geopolitical risks including tensions in the Middle East and continued instability in Ukraine.
– The CBOE Volatility Index (VIX), often referred to as Wall Street’s “fear gauge”, has elevated, indicating increasing investor anxiety.
– Investors have been rotating out of emerging markets and commodity-linked currencies like the loonie and into relatively safer investments, benefiting the U.S. dollar index.
According to Scotiabank’s currency analysts, “Canadian-dollar weakness aligns with a broader picture of soft risk appetite which has supported safe-haven flows and led to stronger capital inflows into U.S. assets, including Treasuries.”
## 2. Crude Oil Prices Falling and Weighing on the Loonie
Canada, as one of the largest oil exporters in the world, sees a strong correlation between its currency and energy prices. When oil prices drop, demand for the Canadian dollar typically falls as well.
– West Texas Intermediate (WTI) crude oil, the U.S. benchmark, has lost ground recently, falling below $80 per barrel. This decline was driven by increasing U.S. crude inventories and concerns about waning global demand.
– The International Energy Agency (IEA) lowered global oil demand growth forecasts, citing fragile macroeconomic outlooks in advanced economies and falling consumption in China and India.
– According to the U.S. Energy Information Administration (EIA), U.S. crude oil stockpiles unexpectedly rose last week, signaling slowing demand amid rising supply.
Lower oil prices lead to reduced revenues from Canadian energy exports, negatively impacting Canada’s trade balance and economic outlook. This correlation tends to weaken the Canadian dollar in tandem with oil prices.
## 3. Central Bank Divergence In Focus
Another significant pressure on the Canadian dollar stems from diverging monetary policies between the U.S. Federal Reserve and the Bank of Canada.
– The Bank of Canada left its overnight rate unchanged at 5.00% in its recent meeting, but markets are increasingly expecting the central bank to initiate rate cuts as early as Q2 or Q3 of 2024. The Canadian economy has shown signs of slowing, including weakening job gains and softening inflation metrics.
– In contrast, statements from several U.S. Federal Reserve officials have remained relatively hawkish. Despite CPI readings that suggest inflation moderation, Fed speakers emphasize keeping higher rates for longer until there’s greater clarity that inflation is sustainably returning to the 2% target.
Scotiabank analysts noted, “The yield spread between Canadian and U.S. bonds continues to favor the greenback. That discrepancy highlights reduced investor interest in Canadian assets and keeps
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