USD/CAD: A Credit downgrade would not hammer the loonie as much as expected – NBF

With the fiscal picture deteriorating fast due to the ongoing recession, the possibility of Canada losing its AAA credit rating cannot be ruled out, according to  Krishen Rangasamy from the National Bank of Canada.

Key quotes

“The real cost of any credit downgrade, namely an expected ramp up in borrowing costs, is likely to be limited thanks in part to the Bank of Canada’s asset purchase program. The Canadian dollar could also be under pressure, with some even calling for a return to all-time lows against USD after a hypothetical credit downgrade.”

“USD/CAD exchange rate is by definition a relative price and hence its trajectory depends on developments in both the US and Canada.” 

“If there’s a macro shock specific to Canada which leaves the US unscathed, sure the Canadian dollar could sink to all-time lows against the greenback. But everything else equal, the fiscal situation on its own (and a hypothetical credit downgrade) is unlikely to hammer the loonie the way some are expecting.”