C$ Hits 3-Week High On Rate Expectations

(Reuters)

The Canadian dollar extended gains against its U.S. counterpart on Thursday to its strongest level in three weeks a day after the Bank of Canada raised interest rates for a third straight time and sounded surprisingly hawkish in its outlook.

The central bank nudged its overnight rate target up 25 basis points to 1 percent and, contrary to most economists’ expectations, did not signal a pause at its next scheduled decision in October. It said rates remained “exceptionally stimulative” but kept all options open due to doubts about the U.S. and global recoveries.

“This is follow through on what’s perceived to be the Bank of Canada leaving the door slightly ajar to more hikes,” said Firas Askari, head of foreign exchange trading at BMO Capital Markets. Read more here.

Canadian Dollar Rallies After Record Jobs Data

(Reuters)

Canada’s dollar shot up one U.S. cent on Friday after a stronger-than-expected jobs report showed a record number of Canadians returned to work in April, adding pressure on the Bank of Canada to raise rates soon.

The currency firmed to a session high of C$1.0338 to the U.S. dollar, or 96.73 U.S. cents, from about C$1.0448, or 95.71 U.S. cents just before the data’s release.

Statistics Canada on Friday said the economy added 108,700 jobs in the month, the highest since Statscan began tracking the data in 1976 and exceeding even the most upbeat estimate in a Reuters poll which yielded a median forecast of 25,000 new jobs. Read more here.

Top Exporter Worry? Dollar Swings

(Globe and Mail)

Forget rising interest rates. Exchange-rate fluctuations are the top concern among Canadian exporters for the coming months, a survey showed Wednesday.

In the next half year, 58 per cent of exporters say volatile currency movements are the top barrier to growth, a HSBC global survey on trade confidence showed. It’s the first time the survey included responses from Canada.

The Canadian dollar has climbed 14 per cent in the past year, and hit parity last month. Concerns about European sovereign debt, however, have weighed on the loonie lately, which is now trading at a two-month low of 96.98 cents (U.S.).

“Fluctuations in exchange rates represent the biggest barrier to trade,” the report said. Canadian businesses are “cautiously optimistic” about trade growth and the global economy, while emerging markets such as Brazil and Indonesia tend to be the most confident. Read more here.

Related: Canadian Dollar Sinks Further On Euro Zone Crisis Fears (Reuters)

Strong Dollar Provides Ego Boost, but Comes with Challenges

(Barbara Yaffe — Vancouver Sun)

Oversized coin needs to be dealt with through increased productivity and international investment, Conference Board of Canada says

Canadians had better develop a game plan for a more muscular Canadian dollar that is going to be around “for a long time to come.”

That was the message Thursday from the Conference Board of Canada which issued a special briefing paper on the challenges posed by a Canadian dollar that this week began running neck and neck with the American greenback.

A stronger dollar clearly is a mixed blessing. […]

The Conference Board argued that Canada must deploy two specific interrelated strategies in response to the rising Canadian dollar.

Businesses must:

- Boost productivity through investment in equipment and machinery, skills upgrading and trade enhancement.

- Increasingly become international players -- inserting themselves into global supply chains through investment or the sharing of resources.

Read more here.

Canadians Taking Advantage of Level Loonie

(Video: WIVB TV-Buffalo • Story: Montreal Gazette)



After nearly two years of being abused by the economy, can the Canadian consumer learn to love again?

With the dollar flirting with parity, and e-commerce making discounts more accessible, analysts say the answer is a resounding “yes.”

The real question is whether shoppers will commit to retailers at home or seek a cheap fling with their U.S neighbours.

“Given the combination of the currency returning to par, and the fact that Canadian consumer confidence has bounced back miraculously in the last year, I think we’ll see a real upswing in cross-border shopping,” says Douglas Porter, deputy chief economist with BMO Capital Markets.

“We’re already starting to see some response, both in the three-hour long lineups at the border this past weekend and in companies beginning to cut prices.” Read more here.

Canadian Dollar Inches Closer to Parity

(Paul Vieira — Financial Post)

The Canadian dollar inched ever closer to parity Monday morning, as traders rushed back into the markets on strong U.S. jobs data released Good Friday. And according to currency analysts, it is only a matter of days, maybe hours, before the loonie crosses the US$1 mark.

“All the stars have aligned for the Canadian dollar. Almost every single factor we look at is in favour of a Canadian dollar that is at or beyond parity on a sustainable basis,” said Camilla Sutton, Scotia Capital’s director of foreign exchange, suggesting parity could come at any moment. “We are not far now.”

As of 11 a.m. ET, the Canadian dollar was trading at the 99.70 US cents range, up from Thursday’s finish of 99.17 US cents and the highest level since July 2008. Read more here.

Loonie Closer to U.S. Parity

(CBC News)

The Canadian dollar marched closer to parity with its U.S. counterpart Wednesday, supported by higher commodity prices and the prospect of continued low American interest rates. The loonie traded above 99 cents US during the morning, but slipped back to 98.97, up 0.35 of a cent on the day, by 10:30 ET.

Yesterday, the U.S. central bank said it will keep interest rates unchanged "for an extended period." That raised the prospect that Canadian interest rates will begin rising before those in the U.S., increasing the value to foreigners of Canadian dollar-denominated debt and the demand for Canadian currency.

"Yesterday's announcement puts the Bank of Canada in a tough position," Dan Sumner, an economist with Edmonton-based ATB Financial, said in a commentary. "The Canadian economy is performing better than the U.S., which means interest rates here will probably begin rising sooner. However, with the continued worries about the Canadian dollar and Canada's export industries still fragile, raising rates will be no easy task." Read more here.

Many Canadian Firms Learning to Cope with Strong Dollar: Think Tank Report

(The Canadian Press – Julian Beltrame)

With the loonie once again nearing parity with the U.S. dollar, a new report on the currency is giving hope it may not be the menace to the economy many believe it to be. The Conference Board weighed in on the subject Monday with a surprising argument – a strong loonie and currency volatility are a net negative for the economy, but not a major impediment, particularly if firms take steps to adapt.

More surprisingly, the think tank said currency fluctuations impact the service sector more than the manufacturing, mining and oil and gas industries, because the latter have found ways to hedge against rapid changes.

The more global and integrated a company is, the more it can ride out the ups and downs of Canada’s relatively volatile currency, the Conference Board said.

“The manufacturing sector was largely able to shrug off the impact of currency volatility prior to the recession,” the report points out. “Most manufacturing industries managed well, as they are integrated into global supply chains, importing inputs into the production process, investing in imported machinery and equipment, and investing in plants abroad.” Read more here.

Loonie at Par by Summer: Economists

(CBC News)

Interest rate increases will drive the Canadian dollar back up to parity with its U.S. counterpart by this summer, according to a growing chorus of economists.

The latest prediction of parity came Wednesday from CIBC World Markets. Its forecast is based on the expectation that the Bank of Canada will hike its key lending rate in July, at least six months ahead of the first hike by the U.S. Federal Reserve. “Indeed, we’ve already seen the Canadian dollar gain several cents in recent weeks as the market began to firm up expectations” of a July rate hike in Canada, says CIBC chief economist Avery Shenfeld.

The loonie was quoted at 97.48 cents US in early Wednesday trading. It’s gained almost 3.5 cents against the greenback in the last two weeks.

CIBC’s currency outlook sees the loonie rising to $1.02 US by September before slipping back to 97 cents US by the end of the year.

While the Bank of Canada’s early rate hike is one of the main catalysts of the dollar’s rise, it isn’t the only one, CIBC says. The investment bank also lists rising demand for commodities as a reason. It sees the dollar benefiting from rising oil, mineral and fertilizer prices as Canadian producers “repatriate profits.” Read more here.

The Loonie Looks Ready To Fly

(Financial Post)

Canada in a bit of a quandary. The strong Canadian dollar has proven to be a challenge for Canadian exports as it has made Canadian goods and services more expensive. This leaves the policy makers at the Bank of Canada between the proverbial “rock and a hard place”.

If it decides to raise interest rates aggressively and the US Federal Reserve decides that it can afford to wait to raise interest rates in the US it is likely that the Canadian dollar could be in for a prolonged period of appreciation. The implication for Canadian exports is clearly negative.

The central bank knows that it has to be mindful of preventing inflationary pressures from taking root. On the other hand, Canadian interest rates can only go so far ahead of US interest rates. If the spread between the two countries’ interest rates widens too far in Canada’s favour, then the Canadian economy could be hit with the sledge hammer combination of high interest rates, a surging Canadian dollar and by extension a slumping export sector. Read more here.

Canadian Dollar Extends Gains Ahead of Budget, Bonds Slip

(Reuters)

The Canadian dollar extended gains against the U.S. currency for a fifth session on Thursday ahead of the federal budget later in the day.

At 9:45 a.m. (1445 GMT), the Canadian dollar was at C$1.0301 to the U.S. dollar, or 97.08 U.S. cents, up from C$1.0320 to the U.S. dollar, or 96.90 U.S. cents, at Wednesday’s close.

“It’s pretty much where we left things yesterday. It’s been a quiet morning,” said J.P. Blais, vice president of foreign exchange products at BMO Capital Markets.

He said there was risk that the Canadian dollar could weaken slightly on softer crude oil prices, an important Canadian export, while the market was also keeping an eye on developments in Europe.

“I think people are concerned about what’s happening in Europe, in the UK and the euro,” Blais said. Read more here.

Canada’s Prospects Outshine Realities Challenging U.S.

(The Globe and Mail)

A smaller deficit leaves Canada in a better position to take advantage of the rebound in the global economy Canadians have long tended to define themselves by what they are not: Americans. As Finance Minister Jim Flaherty prepares to deal with the fiscal cost of the recession, that distinction is taking on new meaning.

Facing the biggest budget deficit since the Second World War and none of the spirit of political compromise necessary to fix it, prospects for the United States. Fiscal reality limits the Obama administration’s options, and it remains uncertain whether the economy is strong enough to reverse an unemployment rate of about 10 per cent without government spending.

As a general rule, what’s bad for the United States is worse for Canada. Exports account for about a third of Canada’s gross domestic product and more than 70 per cent of those shipments are destined for buyers in the country’s southern neighbour. In 1982, the U.S. economy contracted 1.9 per cent, compared with a 2.9-per-cent slump in Canada, according to the International Monetary Fund; in 1991, U.S. gross domestic product dropped 0.2 per cent, compared with a decline of 2.1 per cent in Canada.

But Canada appears destined to do better during this period of American economic woe, which has come to be typified by that stubbornly high unemployment rate and a budget deficit that is 10.6 per cent of gross domestic product… Read more here.

Opinion: Time to Stop Fretting Over the Canadian Dollar

(CB Online – Stephen Gordon)

The Canadian dollar has recovered from the losses it suffered during the financial crisis, and seems set to reach parity with the U.S. dollar within the next year or two. There has also been a recovery in commentaries expressing concern for the effects of this appreciation on exports, particularly in the manufacturing sector. Between 2002 and 2008, our currency rose by 50%, and the manufacturing sector shed more than 300,000 employees. Shouldn’t the Bank of Canada be trying to prevent this from happening again?

Well, no. These arguments miss a key point of international trade theory: exports are costs. The reason we participate in world markets is to obtain goods that we can’t easily produce for ourselves; exports are the price we pay to foreigners in exchange for the imports we want. In a perfect world, we would obtain an infinitely large quantity of imports in return for an infinitely tiny amount of exports. So, a rising dollar is to be welcomed. Read more here.

Canadian Currency Depreciates on the Outlook for Global Growth

(Chris Fournier — Bloomberg)

Canada’s currency weakened as commodities, European stocks and U.S. equity-index futures fell, reflecting concern that global economic growth will slow.

“Risk aversion is dominating trading, whether we look at equities or commodity-based currencies,” said Matthew Strauss, senior currency strategist at RBC Capital Markets in Toronto. “We can look at oil prices and all the other commodities declining and that’s adding some weight.”

The Canadian dollar weakened as much as 1 percent to C$1.2436 per U.S. dollar, from C$1.2316 yesterday. It traded at C$1.2388 at 8:07 a.m. in Toronto. One Canadian dollar buys 80.71 U.S. cents.

Political uncertainty is also weighing on Canada’s currency, according to Strauss. Promises by the country’s opposition parties to fight Prime Minister Stephen Harper’s proposed spending cuts may bring down the minority Conservative Party government.

Canadian Dollar’s Plunge Could Help Canada Weather Economic Slowdown

(The Canadian Press – Christine Owram)

Experts say the plunging loonie, now at its lowest level in more than three years, could help Canada weather a global economic slowdown by making exports more competitive but things will be tough.

Canada’s manufacturing sector suffered as the dollar soared above parity with the U.S. greenback last year for the first time in decades. The strong dollar made Canadian-produced goods relatively more expensive and hurt export-based industries, particularly the auto and forestry sectors, which have lost thousands of jobs in the last year.

One hope for Canadian exporters is that the loonie’s drop may soften the impact of a worldwide recession.

“It will help, but to the extent that the weak Canadian dollar is also a symptom of poor global economic growth, it’s more of a cushioning of the recession rather than a cure for it,’’ said Avery Shenfeld, a senior economist with CIBC World Markets. He said the Canadian economy is too tightly intertwined with its American counterpart – reeling from the continued financial meltdown – for the currency exchange rate to reverse its woes completely.

The Canadian dollar closed Wednesday in North America on Wednesday at 79.70 cents US, down 2.69 cents from the previous close. It dropped another third of a cent in overseas trading early Thursday. The loonie – which hit its all-time high of 110.31 cents US almost a year ago, last November 7 – hasn’t been below 80 cents since mid-2005.

The Canadian dollar is considered a commodity currency, meaning the decline in the price of crude oil, metals and minerals due to shrinking global demand has been a major factor in the loonie’s fall. December crude contracts fell $5.43 Wednesday to settle at US$66.75, the lowest close for a front-month futures contract since June 13, 2007, when crude settled at $66.26.

TD Bank chief economist Don Drummond said his benchmark for the dollar is 85 cents US, because Canada’s economy is approximately 85% as productive as that of the United States. “We’ll deviate from that depending on whether commodity prices are above or below their trend,” Drummond said. Read more here.

C$ Rises as Bank of Canada Leaves Rates Unchanged, Notes Domestic Demand Strong

(The Canadian Press)

The Canadian dollar moved higher Wednesday after the Bank of Canada decided to leave its key rate unchanged at three per cent, noting that “overall, the level of economic activity is slightly lower than expected in July but still close to the economy’s production capacity.”

The currency was up 0.15 cent after the announcement to 93.73 cents US as the bank said that “domestic demand has slowed modestly but remains strong.” “It continues to be supported by financial conditions that remain significantly better than those in most other major economies and by income gains stemming from past improvements in the terms of trade.”

Meanwhile, another day of retreating oil prices is expected to drive the Toronto stock market lower while New York indexes are also likely in for a negative opening on more jitters in the financial sector and geneal worries about the overall economy. Find out more.

Dollar Parity Possible – But Then What?

(Stephen Poloz — Export Development Corporation)

Many have begun to contemplate the possibility that the Canadian dollar might reach parity with the U.S. dollar. Since the vast majority of export sales are conducted in U.S. dollars, a 10 per cent rise in the Canadian dollar would clip C$3-4 billion per month from export revenues – a serious matter.

Dollar parity is obviously possible. After all, we had it 30 years ago. Plus, the dollar has risen by nearly 30 cents since 2003, so another 8-10 cents is not out of the question. But the deeper question would be, first, what would cause it? And second, what would happen next?

One route to parity would be a speculative bubble. Canada looks attractive in the context of high commodity prices, low inflation, a strong fiscal situation and a trade surplus. Economic history is littered with periods of exchange rate volatility that cannot be explained by economic models.

The story would not end there, though. A rise in the dollar to parity in the absence of an accompanying strengthening of Canada’s economic fundamentals would slow the Canadian economy significantly. Monetary policy would ease and the speculative bubble would pop.

Another route to dollar parity would be a further big ramp-up in prices for commodities, particularly oil. According to EDC’s model for the Canadian dollar, a rise in the price of oil of $10 translates into a currency appreciation of 3 cents. Given current conditions, a rise in the price of oil to the $100-110 range would take the Canadian dollar to parity. This is clearly possible.

Again, though, the story would not end there. The global economy would slow significantly, prices of other commodities would retreat, oil prices would probably retreat as well, monetary policy would ease and the Canadian dollar would reverse some of its gains.

The third route to parity is through productivity gains here in Canada. The reason why models of the Canada/U.S. exchange rate point to a natural value somewhere between 75-80 cents is that Canadian business productivity levels are on the order of 80 per cent of U.S. productivity levels. This reflects a steady erosion in Canada’s relative productivity performance during the past 20-25 years. That means that a level of the dollar in the 75-80 cent range levels the playing field for manufacturing in the two countries, making costs of production about equal.

Narrowing that productivity gap would lead naturally to a higher Canadian dollar over time. This began in 2005, when manufacturing productivity rose 5.4 per cent in Canada and 5 per cent in the U.S. We expect Canada’s outperformance to continue, but it will take many years to close a 20 per cent gap and move the natural level of the Canadian dollar up to parity. The good news is that such a gradual move would be sustainable, because improved fundamentals would be driving the dollar’s rise.

The bottom line? The Canadian dollar can clearly reach parity, but under current conditions it would prove short-lived. Rising productivity is the surest route to a stronger currency. And even if the strong currency comes first, higher productivity is the best cure for the accompanying stress.