Is Canadian Forex Safe During This Covid Pandemic?
The Covid-19 pandemic has significantly impacted financial markets, and perhaps you are wondering, “Is Canadian forex safe?” For the past few weeks, the coronavirus has affected forex trading, and nearly all currencies plunged, including the Canadian dollar.
What happened on the forex market in the past few months is an excellent example of how external events, such as the Covid-19 pandemic, can impact currencies. Nobody had an idea of how fast the virus would hit the global economy. No country was spared.
Even during the best of times, foreign currency exchange is one of the most significant risks Canadian businesses face when selling and buying globally. Foreign investors are also concerned about the risks, and they have to ensure the Canadian forex is safe.
In this guide, we look at how the pandemic has significantly impacted the Canadian foreign exchange market and the global market. In the end, you will be able to determine if the Canadian forex market is worth investing in during the coronavirus pandemic.
Impacts of the Covid-19 Pandemic on Foreign Exchange Markets
With the prolonged coronavirus pandemic, several currencies have reduced to multi-year lows. The most affected are the currencies of countries that heavily rely on foreign income from commodity exports, such as oil which went down by 70 percent in a month.
The global oil prices suffered an unprecedented collapse on March 9, 2020, after Saudi Arabia pledged to boost oil production and cut the costs. That was after Russia refused to join the OPEC-steered production cut deal and provided no room for negotiations.
Since Canada is one of the largest oil-exporting countries, the global drop in oil prices affected its currency. The Canadian dollar weakened against prominent currencies like the U.S. dollar. Also, the exchange rates of emerging countries got battered.
If the currency values in the stronger economies were to remain the same, the emerging markets would have experienced recessions never seen before since the 1930s. That’s because countries with emerging markets, like Brazil, had substantial capital outflows.
Foreign investors who had accumulated assets in the emerging economies were selling them as quickly as possible and sending back the funds to their home countries. Some of them were also buying U.S. dollars by selling the local currencies at lower prices.
On the other hand, advanced economies like Britain, France, Japan, Germany, and the U.S. had significant capital inflows. It’s because international investors were trying to rebalance their investment portfolios from riskier to conservative assets.
How the Covid-19 Pandemic Affected the Canadian Dollar Strength
Since Canada is one of the world’s largest oil-producing countries, the Loonie strongly correlates with crude oil prices. During the pandemic’s peak in March 2020, when the oil prices had plunged significantly, the Canadian dollar weakened.
In February 2020, the USD/CAD exchange rate was 1.32. One month later, in March, at the peak of the pandemic, the exchange rate changed to 1.45. That is a sign that the Canadian dollar weakened significantly against the U.S. dollar during the pandemic.
Though the good news is that the Canadian dollar has made a shocking comeback on the foreign exchange market. The Loonie has returned to pre-Covid levels and is even stronger than before the pandemic. As of May 5, the USD/CAD was at 1.22.
Is Forex Trading Safe in Canada during the Covid-19 Pandemic?
Despite the mass roll-out of vaccines, the coronavirus pandemic is not yet over. Canada is still reporting thousands of new Covid-19 cases daily.
According to Maclean’s, “the persistently high rate of new cases is also reflected in the overall number of COVID-19 patients in hospital, which has remained stubbornly high.”
The good news is, the Canadian dollar has regained its strength. The USD/CAD is now at 1.22 (May 6, 2021), compared to 1.45 on March 6, 2020, at the peak of Covid.
It took around five months for the Canadian dollar to return to pre-Covid levels, and it even turned out stronger. That has made the Canadian dollar a safe asset to invest in.
Why the Canadian Forex is Safe for Investments
Right now, it is very safe to invest in Canadian forex. The Canadian dollar continues to grow stronger because of expectations for a robust post-pandemic boom.
The strengthening Canadian currency has been hastened by the massive monetary and fiscal stimulus from the U.S. and Canadian governments at low interest rates.
How the Government of Canada Can Intervene in Foreign Exchange
The Bank of Canada has the mandate to conduct foreign exchange market intervention on behalf of the federal government. It achieves that by using the government’s Exchange Fund Account with foreign currency holdings, such as U.S. dollars and British pounds.
Suppose the federal government wants to moderate a decline in the Canadian dollar’s relative price, The Bank of Canada will purchase Canadian dollars in forex markets in exchange for U.S. dollars from the government’s Exchange Fund Account. The demand for Canadian dollars will increase, raising the dollar’s value.
The Bank of Canada will ensure that its purchases don’t take funds out of circulation, as that could result in a shortage of Canadian dollars. That will put upward pressure on Canada’s interest rates. So the Bank will redeposit the exact amounts of Canadian dollars into the federal financial system to sterilize the foreign currency purchases.
What if the federal government wants to slow the CAD’s appreciation rate?
In this case, the Bank of Canada will sell Canadian dollars from its CAD cash balances and buy other currencies. When the Bank sells the Canadian dollars, it increases the CAD’s supply in foreign exchange markets, providing some level of resistance to the currency’s upward movement.
The Bank of Canada can stop the downward pressure on Canada’s interest rates by “sterilizing” the impacts of the Canadian dollar sales. It achieves that by withdrawing the same amount of the CAD balances sold from the federal financial system.
Note that the Bank of Canada will add all the foreign currencies bought at the time of selling the Canadian dollars to the federal Exchange Fund Account.
Is Canadian forex safe during the Covid-19 pandemic? The answer is yes! All you have to do is get all your financial tools right and choose less volatile investment vehicles. At Knightsbridge F.X., we can help you get the lowest exchange rates possible to help you save hundreds of dollars on your currency exchange.