Loonie roars ahead again
Experts surmise extremely weak U.S. dollar a driving force
thestar.com
May 30, 2009 04:30 AM
RITA TRICHUR
MADHAVI ACHARYA
TOM YEW
BUSINESS REPORTERS
The Canadian dollar roared ahead again yesterday, firing on all cylinders as the greenback retreated, crude oil prices climbed and blue-chip stocks rallied in New York.
By the time the dust settled, the loonie had gained 1.9 cents (U.S.) to 91.60 cents. The currency has risen by 9.5 per cent since April 30, the most since at least October 1950, according to Bloomberg data.
"I think the biggest driver is extreme U.S. dollar weakness that we are seeing across currencies," said Camilla Sutton, a currency strategist at Scotia Capital.
"Sentiment has turned against the U.S. dollar. The positive U.S. dollar flows that we were seeing earlier this year and the fall of last year have essentially disappeared as risk aversion has come back down to more normal levels."
As the U.S. dollar moves back to its pre-financial crisis levels, it is rapidly losing ground against the loonie, the Australian dollar, the euro and other foreign currencies.
For its part, the loonie's climb is also being buttressed by a fresh surge in crude oil prices. Yesterday, light, sweet crude for May delivery rose $1.23 to $66.31 on the New York Mercantile Exchange.
And while Canada's benchmark stock index closed slightly lower, American markets continued their rally. The Dow Jones industrial average gained 96.53 points to 8,500.33, while the Nasdaq moved 22.54 points higher to 1,774.33.
Analysts said those gains signal increased optimism about the global economy – bullish sentiment that bodes well for petro-currencies such as the loonie. If those trends continue, the Canadian dollar could easily hit 93 cents in the coming weeks, said George Davis, chief foreign exchange strategist with RBC Capital Markets.
He warned, however, the capricious currency may not stay at that level for long. That's because the rally in equity markets is now reaching a "mature phase" and stocks are likely to experience a correction over the summer.
"I think we could potentially see a move back down toward the 89-cent level as we progress through the summer months," Davis said. "I think the key focal point is going to be on equities and that's going to determine the fate of the Canadian dollar, so to speak."
There has been increasing volatility in the Canadian dollar since last fall, giving the currency a much wider trading range in any given session. While currency traders are growing more accustomed to the swings, the volatility is creating additional challenges for a wide variety of Canadian businesses, which are already grappling with an uncertain economic outlook.
"It is difficult for a lot of corporates to accurately forecast their cash flows in terms of what their hedging requirements will be," Davis said.
Finance Minister Jim Flaherty acknowledged those concerns yesterday, suggesting he and other key economic stewards are keeping a close watch on the currency.
"We are always concerned when there are rapid fluctuations in the value of the Canadian dollar and it has been relatively rapid in the past few weeks. I know that the governor of the Bank of Canada is monitoring that," Flaherty told reporters in Toronto.
For its part, the Bank of Canada is expected to release its next interest rate decision on June 4. While the central bank is expected to leave its trendsetting rate at 0.25 per cent, economists surmise it may comment on the currency, given that it has risen sharply since its April announcement.
While the currency's recent strength has Canadians once again musing about a return to parity with the U.S. dollar, experts say that is unlikely to occur – at least in the near term.
"At this pace, the loonie could reach par sometime in July," observed Helmut Pastrick, chief economist at Central 1 Credit Union. "While that is not expected to play out, and some fallback would be usual, the medium-term trend is for a higher loonie."
With files from The Canadian Press and Bloomberg |
