Canadian Dollar Outlook Suffers Due To Recession Fears

According to data, the Canadian dollar is not expected to gain as much ground in the coming year as previously expected because the demand for safe-haven currencies like the US dollar has gone up, thanks to the growing risks of a global economic slowdown.

Canadian currency strengthening

The forecast had indicated that there would be a 1.6% rise in the Canadian dollar against the US dollar, which would bring it up to 1.28 in a period of three months. The last month’s forecast had put the Canadian dollar’s value at 1.26 against the greenback. In a year’s time, the Canadian currency had been expected to hit the 1.25 mark, as opposed to the previous 1.23 forecast.

Market analysts said that recession risks have gone up and they are now being priced into markets as well. They said that the US dollar would be in demand because of the risk factor and it was the support for the USD that would contribute to a decline in the Canadian dollar.

Economic concerns

In recent weeks, global economic forecasts have been slashed as supply shortfalls continue to worsen due to the lockdowns in China and the war in Ukraine. This has made it likely that central banks will not stop aggressively hiking interest rates in order to combat inflation.

One of the major Canadian experts, oil has recorded a fall in recent weeks by $25, as it fell below $100 per barrel. Likewise, the Canadian stock market, which is commodity-linked, has also shed 15% of the high it had reached in March.

In comparison, the US dollar seems to be faring a lot better, as the currency climbed to two-decade highs against a basket of its peers, which includes a sharp rise against the euro. Analysts said that the negative ton in regard to risk assets would not change until the central bank decides to shift its policy.

Interest rate

The Bank of Canada is expected to increase its interest rate by a whopping 75 basis points in the coming week and an additional 50 basis points in September as well. Their aim is to take the monetary policy to a place where they would be able to control the economy.

With central banks tightening their monetary policy, yield curves have gotten flat. There has been an inversion in the US Treasury curve, which refers to the difference between 2-year and 10-year Treasury yields. Every time this phenomenon has happened in the past, it has led to a recession in the US.

Almost 75% of Canadian exports are to the United States. Therefore, market analysts said that if an economic recession occurs in the United States and oil prices continue to decline, then this would be bad news for the Canadian dollar. The currency is expected to stay under pressure because of these factors, which means that it would eventually decline. What happens in the US markets will significantly affect the Canadian currency and this is something currency experts are keeping in mind.

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