DJ Forex Focus

The Bank of Canada tried to clip its wings, but the loonie is still going to fly.

First of all, verbal intervention, as conducted by the central bank after its last policy meeting Tuesday, will have a limited impact.

The bank expressed its concern about the currency's recent strength and the risk it poses to Canadian export growth.

However, as far as currency market investors are concerned the central bank isn't a serious threat to the Canadian dollar's recent rally.

The latest data on speculative positions in the futures markets show that while the market may be long net Canadian dollar, these positions remain well short of previous extremes and there is still plenty of scope for the Canadian currency to rise.

Also, seeing that the Bank of Canada itself hasn't been in the market since 1998 to manipulate its currency, chances are that the central bank will be reluctant to intervene at this stage even if it wants to.

In fact, as time goes on, the Bank of Canada will find that trying to talk the currency down will probably become increasingly difficult as the market realizes that the central bank's words won't be backed by actions.

In the meantime, the factors that helped drive the U.S. dollar all the way down to nearly C$1.02 earlier this month from well over C$1.30 in early March, are likely to remain in place.

Despite the Bank of Canada's downgrade to growth forecasts for next year and 20l1, the Canadian economy is still likely to surprise on the upside and continue to show growth prospects well in advance of other major economies, especially now that the Bank of Canada has chosen not to hike interest rates as quickly as the market expected.

Chances are that the global economic recovery will also continue to provide fuel for the loonie's rise.

Like other commodity currencies, such as the Australian dollar, the Canadian currency has been driven steadily higher by the rally in global commodity prices.

As global demand increases, led by the Asian economies that are quickly bouncing back out of recession, the rally in commodity prices will continue - ensuring that the Canadian dollar remains popular as global investors find even more appetite for risk.

Even developments in Canada's political landscape appear to be working in the currency's favor with the opposition Liberal Party halting its campaign to topple the government and trigger an early election.

So although the U.S. dollar's decline toward parity with its Canadian counterpart may have halted for now, the trend will more than likely continue, with investors taking this pause as an opportunity to start buying the loonie once again.

Disappointing GDP data from China, showing that third-quarter growth wasn't quite as strong as the market anticipated, helped to push the dollar higher early Thursday in Europe, rising to C$1.0489 by 0645 GMT from C$1.0430 late Wednesday in New York, according to EBS.

The dollar rose to Y91.41 from Y90.89, while the euro slipped to $1.4982 from $1.4998. The single currency was also up at Y136.97 from Y136.32.