Analyst: Euro poses a greater risk to the loonie than the greenback

Avery Shenfeld, managing director and chief economist at CIBC Capital Markets, has raised concerns about the Canadian dollar’s vulnerability due to potential shifts in the global currency market. While many economists have focused on the divergence in fiscal policy between the Bank of Canada and the United States Federal Reserve, Shenfeld believes that the euro could pose a bigger threat to the loonie.

Shenfeld highlighted the importance of monitoring the euro’s performance against the greenback, as it has historically influenced the Canadian dollar’s valuation. He noted that the euro’s exchange rate with the USD has a significant correlation with the loonie’s value against the greenback.

The economist suggested that a potential rebound in the euro against an overvalued greenback could benefit the loonie. However, if eurozone countries maintain austerity measures, leading to further easing by the European Central Bank and a slowdown in the Fed’s easing, the greenback could strengthen, leaving the loonie vulnerable.

Shenfeld emphasized the need to keep an eye on budget decisions in major eurozone countries to hedge against Canadian dollar risks. While the Bank of Canada is considering interest rate cuts, the Fed is awaiting more economic softening before making a move.

Despite the potential risks posed by divergence in monetary policies, some economists believe that the Bank of Canada could diverge from the Fed without significant repercussions. Shenfeld also suggested that any losses in the loonie due to policy divergence would likely not be sustained in the long term.

As the global currency market continues to evolve, it is essential for investors and policymakers to stay informed and adapt to changing conditions to protect against potential risks and capitalize on opportunities.