The Canadian dollar is the worst performing major currency over the past month. It has lost nearly 4.5% against the US dollar.  That brings its year-to-date loss to almost 12%.  

There had been two main sources of pressure on the Canadian dollar. The drop in oil prices, which poses a negative terms of trade shock on the economy. While under normal conditions, we typically emphasize factors that impact the capital markets over the goods markets when assessing the outlook for a major currency.  This is especially true of a reserve currency. However, the magnitude of the decline in oil prices, and the fact that various parts of the Canadian economy seemed leverage to high oil prices requires adjusted our analytic framework.  

The second factor that has pressured the Canadian dollar is the Bank of Canada's monetary policy.  The January rate cut was a surprise.  Last month's rate cut was less surprising, but the dovishness of the central bank was unexpected.  Bank of Canada Governor Poloz not only kept the door open to additional easing but also put QE on the table for the first time.  To be sure, expanding the central bank's balance sheet was cited in the context of a range of options that the central bank could adopt if necessary.  It was clearly not a commitment to do so at this juncture.  

Canada surprised investors before the weekend by reporting that the economic contraction that was evident in Q1 has spilled over well into Q2.  The May GDP unexpected contracted 0.2% after a 0.1% contraction in April.  According to the monthly GDP estimate, the Canadian economy expanded only in one month since last October, and that was the 0.4% expansion in December 2014. In contrast, note that the Q1 contraction in the US has been revised away (now +0,6%) and Q2 expanded by 2.3%.   The divergent economic performance is reflected in the expected divergence of the trajectory of monetary policy.