Some good news in a somewhat morbid sense:
Canadian dollar crosses key C$1.50
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By Paul Casciato
LONDON (Reuters) - The Canadian dollar fell past a key psychological barrier at C$1.50 ($0.6666) to set new record lows against the U.S. dollar on Monday, undermined by interest rates below those in the U.S and a fragile economy.
Dealers said the Canadian dollar set a new historic low of C$1.5022 ($0.6656) after grinding down on hawkish interest rate comments by U.S. Federal Reserve Chairman Alan Greenspan at his Humphrey-Hawkins testimony last week.
"That helped it and there are a lot of economists jumping on board saying the Canadian dollar can achieve really low targets," said John Glover, vice president and director of foreign exchange for the Toronto-Dominion Bank in London. "Our own economist came out over the weekend and said 50 cents (U.S.) was not out of the question."
Last week Greenspan warned U.S. lawmakers that the risk of inflationary pressures continued in the U.S. economy and that further strength in wage inflation could force the Federal Reserve to raise U.S. interest rates.
Such a rise would widen the interest rate differential between higher U.S. rates and lower Canadian ones. The fall of Canadian interest rates to levels below those of the U.S in the last two years has steadily ground down the Canadian dollar.
On Monday U.S. Federal Reserve funds were at 5.50 percent, while the Bank of Canada's operating band for overnight funds was at 4.5 to 5.0 percent.
Affectionately known by Canadians as the "loonie" after the waterfowl depicted on the country's one dollar coin, the Canadian dollar has lost more than seven U.S. cents over the last two years and 22 U.S. cents in the last six years. "They've got interest rates below the U.S. and while that happens why buy Canada," said one dealer at a major Canadian bank in London. "You might as well invest in the U.S.."
At 0945 GMT the Canadian dollar was trading at 1.5000/10 compared with 1.4984/89 in late European trading on Friday. Traders said the Canadian dollar has also been left exposed by a hamstrung Bank of Canada, which cannot raise interest rates to defend the currency for fear of squelching a fragile economy. They said they had expected the Bank of Canada to appear in defence of the Canadian dollar ahead of 1.50 on Friday and its failure to appear prompted more selling.
"We thought on Friday, the Bank of Canada would have been in early to defend this 1.50 level and there was absolutely no sign of that," said a trader.
They said the market would focus on the hours when the Bank of Canada begins its trading operations around 1355 GMT on Monday for a possible rate rise to defend the currency.
"We will see what happens at the window," another trader said. "I don't think anyone will be long dollars ahead of that." The Bank of Canada last intervened to buy Canadian dollars for U.S. dollars on July 15 at the C$1.4870 ($0.0.6725) level. "I spoke to them (the Bank of Canada) last week and they are not happy about where the dollar is," said Ian Amstad, economist at Banker's Trust in London.
But he said low inflation, weak commodity prices and a strike by General Motors Corp workers, made the central bank unwilling to raise the cost of financing. "With inflation running at 0.8 percent on their underlying measure and some of their real economy numbers looking a little bit soft they are reluctant to move," Amstad said.
He said the Bank of Canada is focused on its Monetary Conditions Index (MCI), as a measure of monetary policy effects and an indicator when an adjustment could be needed.
On Friday, the Bank of Canada reported the MCI fell to its lowest level in more than a year to -6.16.
The index measures the the three-month prime corporate paper rate and the Canadian dollar index against the 10 major currencies. The index base is January 1987. The more negative the index, the looser monetary conditions are deemed to be.
"Now it's a matter of the market deciding when the MCI is at a level where the Bank (of Canada) has got to do something and we're already through the levels where everyone had thought that would be the case now," Glover said.
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