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Strategies & Market Trends : The coming US dollar crisis -- Ignore unavailable to you. Want to Upgrade?

To: Cogito Ergo Sum who wrote (20618)	5/31/2009 5:50:10 AM
From: Condor	Read Replies (1) \| Respond to of 71475

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

To: Cogito Ergo Sum who wrote (20618)	6/5/2009 6:04:36 AM
From: Condor	Read Replies (1) \| Respond to of 71475

Loonie's climb threatens recovery: Bank of Canada Jun 05, 2009 04:30 AM Les Whittington Ottawa Bureau The Star OTTAWA–The high-flying loonie may make it cheaper to shop or vacation south of the border, but it won't save jobs or help put an end to the recession gripping Ontario. In fact, the Bank of Canada warned that the dizzying rise of the Canadian dollar to the 90 cents (U.S.) range on exchange markets could mean the worst of all possible worlds for Ontarians. Governor Mark Carney has lowered the central bank's key rate to 0.25 per cent – a historic low – to encourage borrowing and investment to fight the recession. The federal government has helped with a $35 billion stimulus package. Until the loonie took flight, those efforts were beginning to have a positive effect, Carney said yesterday: "In recent weeks, financial conditions and commodity prices have improved significantly, and consumer and business confidence have recovered modestly." But this has now been imperilled by the Canadian buck, which recorded a seldom-seen eight-cent jump in value against the U.S. dollar in a single month in May. "If the unprecedentedly rapid rise in the Canadian dollar ... proves persistent, it could fully offset these positive factors," the bank warned. Nowhere is this more true than in trade-dependent Ontario where some 80 per cent of exports go the United States. With demand for exports in the U.S. undercut by its severe recession, Ontario's economy is now the worst performer among Canada's provinces. Last fall, as the global recession deepened, investors turned to the traditional "safe haven" currency, the U.S. greenback. That trend, coupled with the decline in prices for Canada's oil and other commodities, reduced demand for the loonie. Its resulting drop below 80 cents (U.S.) in October offered hope for Ontario, since it made exports more competitive. Now, while U.S. business conditions have still not recovered – keeping demand for Canadian exports down – the currency trends that held promise for Ontario's manufacturing sector have reversed. Prices for oil and other commodities are rising and the world is losing faith in the U.S. dollar amid investor fears about the nearly $2 trillion (U.S.) budget deficit. This has produced a "generalized weakness in the U.S. currency" and driven up the loonie, Carney said. Higher energy prices are another strike against Ontario manufacturers, pushing up production costs. With economists expecting the loonie to stay high, doubts have been raised about whether the economy will, as predicted, show signs of recovery in late 2009, and whether the Bank of Canada will be forced to resort to untested, potentially inflationary measures to boost economic growth.

To: Cogito Ergo Sum who wrote (20618)	6/5/2009 6:09:49 AM
From: Condor	Respond to of 71475

Carney signals bank could move against flight of the loonie KEVIN CARMICHAEL Globe and Mail OTTAWA — From Friday's Globe and Mail, Friday, Jun. 05, 2009 03:49AM EDT The Canadian dollar's surge has become such a serious issue for the economy that Bank of Canada Governor Mark Carney has been pushed into doing something he almost never does: Talk about the currency. In unusually direct language, the central bank said yesterday that the loonie's "unprecedentedly rapid rise" in the past month could "fully offset" early signs of economic recovery if the surge persists. The comment came in the Bank of Canada's latest interest rate announcement, which left the benchmark lending rate at an effective floor of 0.25 per cent, a level at which policy makers had already said the overnight target will likely stay until the middle of next year. Investors and economists took note of the currency comment because Mr. Carney, a former investment banker, so rarely broaches foreign exchange rates, a sensitive subject because traders so often make bets based on the comments of economic officials. The loonie's jump above 90 U.S. cents would have been difficult to ignore in any assessment of Canada's trade-dependent economy. Still, many analysts were surprised that policy makers went as far as suggesting the exchange rate could prolong the recession. The Bank of Canada's prediction could cause some of those traders to increase odds of Mr. Carney intervening in foreign exchange markets, which would tame the currency's more than 10-per-cent rise since the end of April. At the same time, a greater focus on the dollar will raise questions about how far Mr. Carney is prepared to go to reduce currency risk in Canada's economic outlook and whether any intervention would be successful. "They bought themselves some time on the currency side," said Matthew Strauss, senior currency strategist at RBC Dominion Securities in Toronto. "The currency is clearly back on their radar screen. The question is what will they do?" More than the level, the Bank of Canada is most troubled by the speed of the dollar's rise. While Canadian exporters prefer a currency that trades at a discount against the U.S. dollar, what really drives them mad is the volatility. Rapid change like that throws off hedging strategies and makes it difficult to set profitable prices. Nuance is everything for currency traders, so even statements of the obvious will get their attention if those utterances are at all different from previous comments. Mr. Carney last weighed into foreign exchange markets in October, after the value of the Canadian dollar had collapsed by almost 20 per cent amid the worst of the financial crisis. He observed at the press conference that the volatility in currency markets at the time was "extreme" and warned that he was "watching developments in foreign exchange markets very closely," a shift in rhetoric that served as a warning shot to speculators. The Bank of Canada didn't intervene then, nor is it likely to do so any time soon. "Where are they on the escalation ladder, with benign neglect being zero and intervention tomorrow being 10? I would say two or three," said Marc Chandler, head of global currency strategy and Brown Brothers Harriman in New York. The central bank hasn't intervened in currency markets since 1998. Policy makers have generally concluded that picking fights with hedge funds is generally a losing proposition, said Chuck Freedman, a scholar in residence at Carleton University in Ottawa and former deputy governor at the Bank of Canada. That doesn't mean Mr. Carney wouldn't tap Canada's reserves to buy U.S. dollars in a bid to counter the speculative pressure on the exchange rate, Mr. Freedman said, noting New Zealand's central bank has said it is prepared to intervene on that basis. "The way the bank approached this in my day was to think about what's causing the appreciation," Mr. Freedman said. "If the market is being driven by economic factors, you don't necessarily want to react because that's probably what ought to be happening." The Bank of Canada said yesterday that the forces driving the currency higher are a both fundamental and speculative, citing higher commodity prices and the retreat from the U.S. dollar as the reasons for the loonie's rise. Economists said Mr. Carney would seek to "talk down" the Canadian dollar before real intervention. That might have begun yesterday. With the currency becoming such a dominant theme in discussions about Canada's prospects, the central bank had to acknowledge that the loonie's ascent is posing problems or risks making the situation worse. "The dollar would have rallied if they had said nothing," Mr. Chandler said. "The market would have interpreted nothing as the Bank of Canada having no concern at all." ****** Potential arsenal With only $40-billion in foreign currency reserves, the Bank of Canada lacks the ammunition to bring about a fundamental shift in the dollar's value. But Governor Mark Carney might slow the loonie's ascent by making speculators think twice, because he could cause them to lose money in the short term. Here's how: Step one: Verbal intervention. Mr. Carney uses more aggressive rhetoric, causing some traders to back off in case he backs his words with real cash. Step two: He uses reserves to buy U.S. dollars. This hasn't been tried since 1998 because policy makers concluded it doesn't work. Still, central banks in Australia and New Zealand keep intervention in their arsenals to ease volatility. Step three: Quantitative easing. One reason Canada looks good to investors is that even with its target rate at the lowest possible, the central bank isn't planning to ease monetary conditions by creating money to buy assets, like the Federal Reserve and the Bank of England. If it did, some investors could lose interest in Canada. Kevin Carmichael