Canadian Dollar

Unnerved by the tremendous appreciation in its nation’s currency, Canada’s Parliament is officially mulling the possibility of pegging the Loonie to the USD.  It’s unclear at what value the two currencies would be linked, perhaps at parity.  However, in testifying before Parliament, the future leader of the Bank of Canada argued staunchly against such an exchange rate regime.  Such a relationship, he warned, would cripple Canada’s ability to conduct monetary policy, independent of the US.  So long as the Loonie remained fixed to the Dollar, Canada would be forced into mirroring US interest rate movements.  Because of several fundamental differences in their respective economies, it seems unlikely that this policy will be implemented. The CanWest News Service reports:

"It would mean that, de facto, Canada would adopt U.S. monetary policy, despite the reality that the structures of our economies are very different and, as a consequence, often require different types of adjustments in response to global developments."

Read More: Carney under fire for role in income-trusts decision

Original post by Jimmy Atkinson and software by Elliott Back

The Canadian Dollar, or Loonie, recently cleared a 47-year
high against the US Dollar.  Its next
major milestone is crossing a level last seen in the late 19^th century!
There are a few reasons for the Loonie’s
continued strength, namely interest rate parity and economic strength.  As a result of the Fed cutting rates for the
second time in as many months, the Canadian benchmark interest rate is now
equal to the American federal funds rate, both at 4.5%.  In addition, record-breaking oil and commodity
prices will ensure that Canada’s
economy will expand further, perhaps as the same pace as its currency.  Reuters reports:

If the U.S. Central bank signals another rate cut in December, or if it goes against
expectations and chops rates by 50 basis points, it could pull the rug out from
under an already unsteady U.S. dollar and clear the way for the Canadian
currency to shoot higher.

Read More: Loonie eyes 130-year high if Fed makes big rate
cut

Original post by Jimmy Atkinson and software by Elliott Back

Over the last five years, the Canadian Dollar has slowly
climbed to parity against the USD, finally reaching the mythical 1:1 exchange
rate last week. Canadian shoppers and
American tourists have taken notice, gradually adjusting their behavior in
accordance wit their changing purchasing power. For many Canadians, this has translated into more frequent shopping
trips across the border, whether for gasoline or for clothing. For Americans, this has resulted in a decline
in the number of tourists visiting Canada. It is also slowly redefining the US-Canada
trade dynamic. However, as Canada has become the United
States’ largest supplier of oil, it is likely Canada that will
benefit most in this relationship. The
New York Times reports:

The weakness of the American dollar worries some Canadian
investors as well as businesses that rely on American customers.

Read More: Currency
Parity Brings Canadian Shoppers South

Original post by Jimmy Atkinson and software by Elliott Back

With its continued strong performance against its neighbor
to the south, the Canadian Dollar is almost defying logic, having jumped to
99cents against the USD in a matter of days. In purchasing power parity terms, the Loony is already among the most
expensive in the world.  However, achieving
parity (i.e. an exchange rate of 1:1) has a psychological value that can’t be
cast in economic terms. Plus, it doesn’t hurt that high commodity prices have
helped Canada to maintain
years of strong growth and become America’s largest trading partner
in process.  And after the Fed chopped 50
basis points off of the US Federal Funds Rate, the Canada-US interest rate
differential is virtually non-existent. One commentator thinks a 1:1 exchange
could provide a basis for more economic cooperation between the two nations.  The Globe and Mail reports:

“Parity is a very normalized level. Our [US and Canada] economies
have become so closely intertwined that I think down the road what you’re
thinking about is more of a North American bloc.”

 
Read More: A call for parity doesn’t look so loony now

Original post by Jimmy Atkinson and software by Elliott Back

Interest rates in Canada remained at 4.5 percent today, resulting in a gain for the Canadian dollar. A statement made by the Bank of Canada showed that the nation’s economy is doing better than expected. Amid credit problems from the neighboring US, it seems Canada remains somewhat unscathed. Forbes reports:

‘Canadian bank traders see little in the BoC minutes to suggest that
future rate hikes are in the works, after today’s ‘no change’
decision,’ said Peter Wadkins at Thomson IFR Markets.

Read more: Canadian dollar gains slightly after BoC decision

Original post by Amy Cottrell and software by Elliott Back

The Canadian Dollar is making a run at forex history, having
reached a 30-year high against the USD this week.  The currency has appreciated by over 50% since
2002, and is up 9.4% this year alone.  The
Loonie is surging on a combination of high commodity prices and attractive
interest rates.  It is no coincidence
that the price of oil has more than tripled over the five year period that the
Loonie also appreciated in value.  In
addition, the Bank of Canada is expected to raise interest rates two more times
in the near-term which would bring its interest rate levels close to parity
with US rates. The last time the Canadian
currency, itself, stood at parity with the USD was in 1976. While it now seems inevitable that the
currency will soon return to that marker, there are still hurdles that need to
be cleared.  Bloomberg News reports:

“A strengthening currency has started to adversely affect
the country’s growth, especially the manufacturing sector, which may raise
concern the BOC needs to keep rates on hold.”

Read More:

Canada

Dollar Reaches 30-Year High on Outlook for Rate Increase

Original post by Jimmy Atkinson and software by Elliott Back

Last week, the Bank of Canada cut interest rates by 25 basis points, bringing its benchmark lending rate down to 4%.  Fortunately for the Canadian Dollar, the rate cut paled in comparison to the 75 basis point move effected by America’s Federal Reserve Bank. While the Bank of Canada offered a hackneyed rationale of "keeping aggregate supply and demand in balance"  for the change in monetary policy, there is still some surrounding haze since Canadian inflation is rising and economic growth is strong. The currency had slipped below parity against its American counterpart, but is now slowly crawling its way back. If commodity prices remain high, the currency will likely push back across that psychologically important barrier of 1:1 with the USD.

Read More: Canadian dollar firms as BoC cuts rates

Original post by Jimmy Atkinson and software by Elliott Back

Over the last few years, commodity prices, equity values, and interest rate differentials all favored Canada.  By no coincidence, the Loonie rallied to such an extent that it soon reached parity with the USD. The relationship between these trends and the Canadian Dollar seemed so cut-and-dried that few analysts paid attention to anything else.  In the last couple months, however, these relationships seem to have suddenly dissolved.  For example, as the price of oil has begun to rise again, the Loonie has unexpectedly lost value.  Meanwhile, the inverse correlation between risk aversion and the Loonie has lost all validity, such that if the S&P 500 increases, the odds that the Canadian Dollar will also appreciate is essentially an even money bet. The Canadian Economic Press reports:

"The breakdown is still quiet tentative but it’s weakened in the last
few sessions. For Canada in particular there isn’t one
story in the market. We have several different stories going on at the
same time."

Read More: Breakdown of Forex Correlations Has Market Participants on Guard

Original post by Jimmy Atkinson and software by Elliott Back

Last week, the Bank of Canada lowered its benchmark interest rate by 50 basis points, to 3.50%.  Though the move was widely anticipated by analysts, whose only uncertainty was whether the bank would cut 50 bps or 25 bps, investors nonetheless punished the Canadian Dollar. The reason cited by the Central Bank in its press release accompanying the rate cut was a sagging economy, due in part to a more expensive Loonie and the concomitant decline in exports. In addition, the Bank indicated that it will likely have to cut rates further over the next few months in order to avoid recession.  In short, it doesn’t look like the Canadian Dollar will upstage its 17% rise in 2007. Bloomberg News reports:

The central bank "has some very dovish words for the Canadian economy.  Retaining the full easing bias and saying the risks to growth are intensifying have caught investors’ attention.”

Read More: Canada Dollar Falls as Bank Reduces Rate, Signals It’s Not Done

Original post by Jimmy Atkinson and software by Elliott Back

Ironically, the faltering US economy has induced the Dollar to appreciate against many of the world’s currencies. The reasoning is that countries whose economies are tied closely to the US will falter even more than the US during a recession. One of those countries is apparently Canada. As a result, the Bank of Canada has already moved to cut rates by 50 basis points in order to mitigate against a full-blown Canadian recession. All of the economic indicators are already pointing downwards and GDP growth is projected to be a paltry 1.8% in 2008.  In addition, exports to Canada’s largest trade partner, the US, have sagged noticeably, such that its current account recently slipped into deficit for the first time in nearly a decade. The Bank of Canada is busy plotting strategy, with additional rate cuts in the offing.  It looks like the monumental run of the Loonie has finally come to an end.  Bloomberg News reports:

Canada’s dollar will probably remain within the range it has
held since the start of the year because investors are still
avoiding risk amid the unsettled U.S. economic outlook. It has traded within about 4 percent of parity with its
U.S. counterpart, after surging last year as high as 17 percent.

Read More: Canadian Dollar Falls on Speculation More Rate Cuts Are Coming

Original post by Jimmy Atkinson and software by Elliott Back

In a recent article published in the Toronto Star, a Canadian columnist outlined five reasons why the Canadian economy is in trouble.  Only a couple factors are unique to Canada, and several can be subsumed under the credit crunch, but the pessimists are sounding broad alarm bells. First on the list is the looming drop in prices for commodities, the cornerstone of Canada’s economy. Oil recently sank below $100/barrel, and gold dropped 5% in one day! In addition, China is threatening to curb demand in order to rein in inflation. 

The second and third causes for concern are a decline in bank credit and loss of confidence, respectively. Neither of these factors are endemic to Canada, as banks around the world have suddenly developed an aversion to risk and have tightened lending accordingly. Next, corporate expansion (namely of American companies) is stalling; Home Depot and Proctor & Gamble have already announced a temporary hold on opening new stores in Canada.  The final factor(s) are American consumers, which collectively spend $9 Trillion per year.  The recent tightening of wallets could spell massive trouble for Canada, since some of its provincial economies are primarily driven by cross-border sales to Americans.

In short, the Canadian economy could actually contract in 2008.  But perhaps the resulting decline in Canada’s currency, the loonie, would make Canadian exports comparatively more attractive and return the economy to firm footing in 2009.

Read More: 5 reasons to start worrying

Original post by Jimmy Atkinson and software by Elliott Back

Just a few weeks ago, the Central bank of Canada aggressively cut interest rates in order to slow the spread of the US economic downturn to Canada. Accordingly, investors were quite bearish on the Canadian Dollar. With the price of oil surging, however, the Loonie has regained some of its luster, inching back towards parity with the Dollar. If commodity prices remain at current levels, Canada may avoid an economic recession. Economists have scaled back expectations that the BOC will have to continue cutting interest rates. Nonetheless, the median investor expectation is for a sustained decline in the Loonie, perhaps to $1.08 by year end. Bloomberg News reports:

The loonie, as the currency is known because of the image
of the bird on the one-dollar coin, has traded near parity with
its U.S. counterpart this year after climbing 17 percent in
2007.

Read More: Canada’s Dollar Reaches Two-Month High as Oil Surges to Record

Original post by Jimmy Atkinson and software by Elliott Back

According to one index, commodity prices have risen 40% over the last twelve months. One would therefore expect the Canadian economy to be commensurately strong. According to the most current economic data, however, just the opposite is true. Wholesale manufacturing sales are down for the second straight quarter. Non-commodity exports are also trending downwards due to sustained economic weakness in the US, Canada’s most important trade partner. Continued strength in the Canadian Dollar is also to blame. In addition, Canadians are traveling abroad in greater numbers, while international visitors to Canada have dwindled to record lows. As a result, Canadian GDP is expected to fall close to 0% for the second quarter, significantly below the Central Bank’s goal of 1%. The Bank will likely respond with a series of rate cuts, perhaps totaling as much as 1%, intended to reduce buying pressure on the Loonie and ignite the economy. Canada.com reports:

"The loonie is rising, boosted by last week’s energy and
resource powered rise in the trade surplus as well as a positive
interest rates spread."

Read More: Deeper rates cuts expected as Cdn. economy slumps

Original post by Jimmy Atkinson and software by Elliott Back

The economic picture in Canada is increasingly resembling that of the rest of the world: slowing growth and rising inflation. Likewise, the dilemma faced by the Bank of Canada mirrors that of the ECB and Fed. Even though Canadian inflation is only 2.2%, the Bank of Canada will probably err on the side of caution, by hiking rates rather than lowering them. Then again, analysts don’t expect the Central Bank to take any action for another six to twelve months, based on the expectation that a cooling economy will naturally bring down inflation. That makes this whole debate seem moot, given how much could happen in such a long time frame. Canada.com reports:

Canadians will get a better idea of the central bank’s thinking when it releases its monetary policy update and governor Mark
Carney opens himself up to public questioning at a news conference later on its
rate-setting decision…

Read More: Bank of Canada expected to steer a steady course on interest rates

Original post by Jimmy Atkinson and software by Elliott Back

2007 was a momentous year for the Canadian Loonie, which rose 17.5% and even reached parity against the US Dollar. 2008 has been somewhat less kind to the Loonie; it has been battered repeatedly from falling commodity prices and the global credit crunch. Actually, even before the price of oil peaked near $140, the link between the Canadian Dollar and natural resources had begun to break down. The rationale among investors had shifted such that expensive commodities were now seen as a drag on global economic growth, and hence, bad for Canada in the long-term. Using this logic, the currency should have received a reprieve from falling prices, but this was interpreted as bad for Canada in the short-term. In other words, a lose-lose situation. Perhaps, the Loonie climbed too high too fast, and a simple technical correction is in order. The Guardian reports:

The Canadian dollar has been stuck in a tight range since the end of last November. If the Canadian currency eventually closes below the low end of that range, it would be considered a sign of U.S. dollar bullishness and likely open the door to further losses.

Read More: Canadian dollar feels heat of economic slowdown

Original post by Jimmy Atkinson and software by Elliott Back

The Canadian Dollar continues to lose its luster. Falling natural resource prices and the credit crunch have combined to exact a devastating blow on the Canadian economy, causing it to actually contract in the most recent month for which data is available. Now, the Central Bank is predicting that the economy will expand by only 1% in 2008. Most economists expect that Canadian Monetary Policy will soon lag US policy, especially if the Fed raises interest rates to combat inflation. Based on these developments, the consensus is that the Canadian Loonie is significantly overvalued, and will lose some of its value over the next few years, falling to a more sustainable level against the US Dollar. Bloomberg News reports:

The loonie will slide to C$1.05 by the end of December, and
to C$1.09 by the start of 2010, according to the median estimate
of 31 strategists surveyed by Bloomberg.

Read More: Loonie Loses Currency Wings as Canada Hurt by U.S.

Original post by Jimmy Atkinson and software by Elliott Back