Flight of the loonie seen continuing
globeandmail.com November 19, 2007
Flight of the loonie seen continuing
ALLAN ROBINSON
November 19, 2007
The volatility in the U.S.-Canadian exchange rate during the past 3½ weeks marked by the soaring loonie has been stunning and strategists see little to take away much of that underlying strength.
"We are seeing unprecedented levels of swings in the currency markets," said Gareth Sylvester, a currency strategist based in San Francisco with HIFX Inc., a foreign exchange risk adviser.
The loonie has weakened since touching $1.10 (U.S.) briefly on Nov. 7. It was trading below $1.03 on Friday after bouncing back 1.2 per cent from a five-week low as a result of stronger oil prices.
The recent moves extend a tumultuous market that has seen the Canadian dollar increase 19.6 per cent on a year-to-date basis.
"In the last 20 years, there have only been three times the U.S.-Canadian dollar [ratio] has moved more than 10 per cent away from its 200-day moving average," according to Scotia Capital Inc. "We are currently experiencing one of these events." It also occurred in 2003 and 2004.
Traders have been disregarding the impact of a U.S. slowdown on the Canadian economy, but that appears to have changed during the past week-and-a-half, Mr. Sylvester said. "The Canadian economy is still inextricably linked to the U.S."
But investors are betting that the U.S. Federal Reserve Board will cut the federal funds rate at least one more time and that could result in renewed greenback weakness, Mr. Sylvester said.
"We feel they will more than likely keep rates on hold in December," he said. Whether the Fed cut comes in December or early 2008 doesn't really matter from a macroeconomic perspective, but there could be a knee-jerk reaction of U.S. dollar strength should the Fed defer the cut in December, he said.
However, there are some long-term factors that could come into play for a weaker Canadian dollar, said Camilla Sutton, a currency strategist at Scotia Capital. The loonie would weaken if oil prices drop well below $90 a barrel or the U.S. dollar begins to strengthen on a broad-based scale, she said.
And there are hints that the Bank of Canada could begin lowering interest rates next year, which would reduce the currency's strength.
The Canadian dollar would also face headwinds if China is forced to introduce new measures to reduce economic growth, said National Bank Financial Inc. in a report to clients.
But for now all signs point to a weaker U.S. dollar. The slowing U.S. economy increases the odds of a rate cut in December and short selling by currency speculators along with threats from China to diversify its holdings away from the greenback are weighing on the currency.
The key data scheduled for release this week in Canada include the consumer price index tomorrow and retail sales on Wednesday. It should be a quiet week in the United States with Thanksgiving on Thursday and data today and tomorrow focused on housing.