The one-year rolling correlation of the dollar-loonie to world equities is stronger than the pair’s relationship with base metals, crude oil and yield differentials, according to the Royal Bank of Canada. That means strategists may have to modify their models to better reflect global risk appetite. It also gives the BOC more leeway in policy without worrying about currency effects.
The loonie’s correlation to the MSCI World Index is around 84 per cent, compared with about 43 per cent in February. For oil, that level is now just under 40 per cent, compared with 53 per cent in February, while the relationship with the two-year Canada-U.S. swap spread is about 28 per cent, after reaching 42 per cent earlier this year, according to RBC data.Swap spreads reflect the declining importance of the BOC’s policy rate. Earlier this year pre-COVID, at 1.
Of course, there’s a flipside to the loonie’s new alliance. If the global economic recovery sputters or coronavirus cases continue to multiply without a break-through vaccine, stocks could take a turn for the worse. The loonie on Tuesday rebounded after declining with equities the previous day amid coronavirus flare-ups in Europe, and as U.S. stimulus talks stalled.
Story has been told and it is not going to end well! Thank JustinTrudeau!
It hasn't been for years.
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