Wednesday, September 9, 2009

The Loonie --- From the Globe and Mail


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All about the loonie
Carney's stance stalls loonie's ascent

After rising to its highest level in a month, loonie suddenly changes course as investors weigh potential reaction from central bank
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All about the Canadian dollar
Despite drop in greenback, investors step up to buy Treasuries

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(24)

Kevin Carmichael
Ottawa — Globe and Mail Update Last updated on Wednesday, Sep. 09, 2009 08:16AM EDT
The Canadian dollar (FXCAU-I0.930.006--%) fell against its U.S. counterpart Tuesday even as other currencies gained, signalling that traders are taking seriously the Bank of Canada's stand against a stronger loonie.
Canada's currency had soared to its highest level in a month Tuesday afternoon, spurred by the updraft from an overnight retreat from the U.S. dollar, when the loonie suddenly changed course, paring gains of as much as 1 per cent on its way to an eventual decline from Monday's level. (The dollar, however, gained from Friday's close.)
Explaining moves in the global foreign exchange market is always difficult, since the reasons can vary widely, from businesses seeking to settle international transactions to speculators trying to exploit differences in the interest rates between two countries.
But because the loonie's reversal happened so quickly after passing 93.5 cents (U.S.), and the earlier rise was based mostly on speculators seeking a higher return than that offered by the U.S. dollar, a plausible explanation was that investors began to worry that the Canadian currency's flight risked a reaction from the central bank.
“The market is not prepared to fight the Bank of Canada at the present time,” said David Watt, senior currency strategist at RBC Dominion Securities Inc. in Toronto. “The prima facie evidence suggests the jawboning is working.”
Bank of Canada Governor Mark Carney has been signalling since early June that a forceful surge by the loonie toward parity with the U.S. dollar risks slowing Canada's economic recovery.
It's to the point that the central bank would have to consider new policy measures to meet its legal mandate of keeping inflation advancing at a pace of about 2 per cent a year.
Canada's currency peaked at 91.5 cents on June 4, when the Bank of Canada issued its initial warning in its policy statement, and tumbled shortly thereafter to 89.6 cents. It closed Tuesday at 92.6 cents.
The central bank's rhetoric – or “jawboning” in market parlance – was hotly debated among economists, many of whom were skeptical the central bank would seek to offset the dollar's rise because of its long history as an advocate for freely floating currencies.
Mr. Carney and his five deputies on the Governing Council are currently debating whether they need to change their policy stance, and will release their conclusions tomorrow morning in Ottawa.
The loonie's decline appeared to be related to traders' hesitancy to test Mr. Carney ahead of that release, either out of fear that further jawboning would spark a reversal on Thursday or because they are factoring the risk of intervention into their strategies.
That's because there were good reasons to buy the Canadian currency Tuesday.
The price of crude rose 4.6 per cent in New York to $71.16, the biggest one-day gain since Aug. 19, according to Bloomberg News. Gold rose $3.10, or 0.3 per cent, on the New York Mercantile Exchange, settling just short of $1,000 an ounce.
Canada is among the world's largest producers of both commodities, and the loonie tends to track changes in their prices. Tuesday proved to be an exception, even as other commodity currencies, such as the Brazilian real and the South African rand, held onto gains against the U.S. dollar.
The Canadian economy also looks good against its peers, making it a relatively attractive place to invest.
George Vasic, a strategist at UBS Securities Canada in Toronto, revised the Swiss bank's outlook for the Canadian economy Tuesday, predicting gross domestic product will expand 2.9 per cent in 2010 from an earlier estimate of 2.4 per cent.
Mr. Vasic said he changed his forecast because financial conditions have improved far faster than he anticipated, meaning consumers and businesses should have ready access to cash as they regain confidence in the economy.
Further down the road, lower budget deficits in Canada mean the “cleanup from this mess will be far smaller” than in the United States and Europe, Mr. Vasic said, referring to the eventual necessity of paying for the trillions in debt run up fighting the financial crisis.
Canada's relative economic strength, paired with rising commodity prices, explains much of the loonie's increase.
Mr. Carney's goal is to slow the increase so exporters have time to adjust at a time when demand for goods is weak.
The central bank just wants to “skim the froth,” Mr. Watt said. “They have been somewhat successful at that.”
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All about the Canadian dollar Wednesday, Jul. 29, 2009 03:05PM EDT
Despite drop in greenback, investors step up to buy Treasuries Tuesday, Sep. 08, 2009 07:55PM EDT
Latest Comments


Augustus

9/9/2009 8:23:00 AM
The loonie will remain strong for two simple reasons: 1- the USD will weaken even more to the point that it will loose its currency standard status. Before that happens, other currencies (Swiss franc and Australia, along with the loonie) will surge because of 2- our financial system is in fair condition, our gvt has a reasonable debt (it's still too high for me, but that's besides the point) and 2- Canada has raw materials that the world needs ... i.e gold, oil and of course ... water!For all these reasons, cdn companies should accept that the cheap loonie is gone and should upgrade their machinery to lower their costs and increase their competitiveness.

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Gardiner Westbound

9/9/2009 7:53:16 AM
Ordered some stuff from the U.S. recently. The credit card company stiffed me 3-percent on the exchange rate. Highway robbery! Still, the government won't do anything about the bank cartel.

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diogenee

9/9/2009 3:38:35 AM
Canada has just had 4 months of trade deficits, the first in 32 years. Now that we are approaching equilibrium again, Mr. Carney wants to tie our dollar to the sinking ship currency? I question the wisdom of that.Have a look at the story link below "investors step up to buy treasuries"Is the new euphemism for printing money, i.e. "quantative easing", behind this strange market for US treasury bonds?

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.... the left coast

9/9/2009 2:53:50 AM
So what would happen if the BOC and Carney fix pegged the Loonie at .90... or whatever ...and that's that. They used to do that at one time... In fact the Chinese government gets away with deliberately undervaluing the Yuan (RMB)... it's not a floating currency.

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Canadian Centralist

9/9/2009 1:01:14 AM
A dollar of about $.90 US is good for everyone. Manufacturing still has a competive advantage against American manufactures (as long as the Libs don't get in and raise taxes as Iggy has promised to do), while providing a fair return on commodiates. The consumer can still get better deals by buying mail order from large US retailers who offer better prices than Canadain stores. Plus it is affordable to travel south in the winter.


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Canadian Dollar ($US) (FXCAU-I) -->
0.93 0.006 --%
As of Tue Sep 08, 2009 4:00 PM
Range: 1 Day 5 Day 1 Year
Full Quote
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