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Canadian, U.S. dollars hover near parity

OTTAWA - The Canadian dollar is back knocking on parity's door and this time it looks like it means to break through.

OTTAWA - The Canadian dollar is back knocking on parity's door and this time it looks like it means to break through.

The loonie jumped sharply Wednesday morning, rising almost a cent to 99.88 cents US before closing at 99.52 cents.

But analysts say it is only a matter of time before the loonie again reaches parity and perhaps well beyond, noting that any combination of a strong economic indicator for Canada or weak signal from the U.S. could do the trick.

"The U.S. dollar is extraordinarily weak," said Scotiabank currency analyst Camilla Sutton, "which implies we'll hover very close to parity for quite awhile."

Since last reaching parity in April, the loonie has approached the psychological barrier several times, only to fall short and retreat.

Sutton said this time may be different, given that the U.S. dollar continues to face pressure and has been falling against most of the world's currencies as the American economy struggles.

Canada's economy is also slowing, but not as sharply, and the currency is being bolstered by relatively strong commodity prices, which brings wealth into the country through oil, natural gas and mineral exports.

As well, Canada's central bank has hiked the policy rate to one per cent in the last few months, in contrast to the U.S. Federal Reserve's zero rate fixing.

The loonie's current surge follows release of minutes from Fed officials signalling the U.S. central bank is preparing to dilute the greenback further buying up treasuries — so-called quantitative easing.

That suggests U.S. central bankers are worried about the slow pace of the U.S. recovery and want to provide more cash to help jump-start stronger growth.

The markets have already priced in some kind of quantitative easing announcement on Nov. 3, but Sutton said there are still some unknowns that could cause an even bigger run on the U.S. currency.

"The questions are what it will look like, how broad will it be and how will it be implemented," she explained.

Last week, former RBC analyst Patricia Croft predicted the Canadian dollar could rise all the way to US$1.15 in the next year, albeit it likely won't stay there for long.

Sutton won't go that far, but doesn't discount the possibility either.

Three years ago, the loonie flew as high $1.10 US, a record, before diving to less rarefied air.

A rising Canadian dollar will make Canadian exports of everything from auto parts, furniture, newsprint and lumber more expensive to American customers. But it will also cut the costs of Florida oranges, machinery and other imported goods — reducing inflation and making it cheaper for industrial Canada to buy new technology from the United States.

For Canadians planning vacations this winter, a rising loonie will lower the cost of trips to sunny destinations in Arizona, Florida and California.

The Bank of Canada views a strong dollar as a net negative to the economy, however, and has on occasion hinted it was prepared to intervene should the value outrace fundamentals.

But Trade Minister Peter Van Loan downplayed the damage a strong loonie could exact on Canadian manufacturers.

"The fact is Canadian companies are not going to be competing by producing the cheapest goods at the cheapest prices, they are going to be competing successfully by producing very high quality products," he said in a telephone interview from Kuwait.

And while Canadians are fixated on the dollar's ascent against the greenback, the loonie has not done that well compared with other world currencies.

Since June 7, the recent high for the U.S. dollar, the Australian dollar is up about 23 per cent, the euro 17 per cent and the Japanese yen 12 per cent against the U.S. currency. In comparison, Canada has gained a mere six per cent, analysts note.

"The Canadian dollar is one of the worst performing currencies in the world, except for the U.S.," said David Watt, a currency strategist with RBC.

The key reason, he said, is that markets lump future prospects for the Canadian economy to what is occurring in the U.S., since three-quarter of Canada's exports head south of the border.

Most analysts doubt that Bank of Canada governor Mark Carney would intervene to ground the loonie, because they do not believe the currency will rise to alarming levels.

"The Bank of Canada would only want to intervene in order to tap the markets on the shoulder and say, 'Look you are being irrational,' and that doesn't seem to be the case," said Watt.

"And they know there's a lot of other currencies in the same boat."

One likely beneficial byproduct of the loonie's strength for Canadians is continuing low interest rates.

The Bank of Canada has taken its policy rate from 0.25 per cent in June to one per cent in September, but economists are now nearly unanimous that the central bank will take a pause at its meeting next week, in part to keep the loonie from appreciating further.

Scotiabank economist Derek Holt says he believes Carney may stay on the sidelines for up to a year.

 
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