Loonie's paradox: soaring against greenback, sinking against safe havens amid global uncertainty
The
Canadian dollar
is currently navigating a complex and somewhat paradoxical landscape in the global currency markets.
While the loonie (Canadian dollar) is experiencing a notable upswing against its southern counterpart, the US dollar, it is simultaneously losing ground against traditional "safe haven" currencies.
As investors globally seek refuge from the turbulence emanating from US financial markets, triggered by President Donald
Trump
's aggressive tariff policies, the Canadian dollar, along with many of its peers, has benefited from a flight away from the greenback.
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The US dollar index, which measures the dollar's strength against a basket of major currencies including the loonie, has plummeted by a significant 9% this year, underscoring this trend.
However, a closer examination reveals a different story. The Canadian dollar has depreciated by 4.4% against the Swiss franc and 2.3% against the Japanese yen this month alone.
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This underperformance against these classic safe haven currencies signals a nuanced investor sentiment, where the loonie, despite its gains against the dollar, is not perceived as a primary shelter during heightened global economic fears.
Karl Schamotta, chief market strategist at Corpay Currency Research, explains this phenomenon by pointing to the fundamental characteristics of safe haven currencies.
These currencies are typically associated with nations boasting reliable legal frameworks and institutions, diversified economies, substantial net international investment positions (holding more global assets than foreign holdings domestically), and a status as net lenders to the global financial system.
"
Canada
meets the first two requirements: it is well-respected and considered a safe place to invest," notes Schamotta.
"But its heavy reliance on the US economy for export demand, its tendency to run trade deficits, and its relatively smaller net creditor position in international financial markets differentiate it from true safe havens."
The initiation of Trump's "Liberation Day" – the unveiling of his reciprocal tariff plans – acted as a starting point for investors seeking safer harbors.
According to Kyle Chapman, a currency market analyst at Ballinger Group, the primary beneficiaries of this "tariff threat" have been the Swiss franc, the Japanese yen, and surprisingly, the euro.
While the Swiss franc and yen traditionally attract capital during periods of volatility, the euro has also emerged as a preferred alternative to the politically embattled US dollar.
Nick Rees, head of macro research at Monex Europe Ltd., highlights the euro as a "chief recipient of haven flows" that would typically have flowed into the dollar. The Canadian dollar has also seen a decline against the euro this month, down by 2%.
Interestingly, the Canadian dollar has demonstrated resilience against a broader spectrum of currencies, gaining ground against 21 counterparts ranging from the Polish zloty and South Korean won to the Brazilian real and Colombian peso, with an impressive 6.2% gain against the Colombian currency in April.
Rees describes this loonie strength as "unusual," defying typical correlations with risk sentiment, equities, and oil prices, all of which have shown declines this month.
The S&P/TSX composite index is down 3.9% in April, and West Texas Intermediate crude oil prices have fallen by 6.1%.
Rees attributes the Canadian dollar's "outperformance" against this wider basket to a perceived easing of immediate tariff risks from the United States.
While Canada has so far avoided reciprocal tariffs, it continues to grapple with existing US tariffs on steel, aluminum, and the non-US portion of completed vehicles.
"However, we also see Canada as holding value as an alternative to the US, allowing investors to retain exposure to North American growth while remaining somewhat more insulated from Trump-specific risks," Rees suggests, indicating potential further upside for the loonie if it can continue to navigate the tariff landscape successfully.
Looking ahead, the ultimate trajectory of the Canadian dollar remains intertwined with the unpredictable nature of US economic policy and its global ramifications.
Schamotta cautions, "If problems in the US worsen to the point that we are facing a global economic or financial cataclysm, investors will quickly revert to their old ways, and the greenback will soar against the loonie," underscoring the inherent limitations of the Canadian dollar's safe haven status in a truly global crisis.
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