The Canadian Dollar's Time Is Coming. By Nicholas Hastings
After a rough ride this month, the Canadian dollar is set to soar again soon.
Like other commodity currencies, the Canadian currency has been suffering from worries over sovereign debt and concern about the global recovery.
The general pullback from risky asset markets has pushed the currency down by more than 5% against its U.S. counterpart over the last few weeks.
See the U.S. dollar's rise against the Canadian dollar:
Click Image to Enlarge
But, now as the Bank of Canada prepares to hike interest rates and the Canadian economy continues to accelerate sharply away from recession, the Canadian dollar looks more like a buy than ever.
This week, the Organization for Economic Cooperation and Development joined calls for the Bank of Canada to start raising rates at its next meeting June 1.
Not only have recent activity data, including retail sales, come in stronger than anticipated but consumer prices indicated that core inflation, as the OECD said, has been "fairly sticky."
Unlike other major countries, including the U.S., Canada can claim quite confidently that its V-shaped recovery is on track.
Canadian banks also give investors some cause for celebration.
Prudent lending means they didn't need the bailouts that many others did during the credit crunch. As a result, Canada hasn't been stuck with some whopping funding bill and the country's deficit--at only 2.7% of GDP--is the lowest in the G7.
China is another good reason to put the Canadian dollar back on the buy list.
As the Peoples' Bank of China looks to diversify its currency reserves out of the dollar, and probably out of a very ill-looking euro too, the Canadian dollar could well stand to benefit.
"The Canadian dollar is not a natural target for the size of flows at China's disposal, but then the latter's re-focusing upon energy security in the past year or so must surely nominate the Canadian currency as a plausible contender," said Neil Mellor, a senior currency strategist with The Bank of New York Mellon in London.
Certainly, any rise in the Canadian dollar back towards parity with the U.S. dollar shouldn't meet with any opposition. If anything, the Bank of Canada is likely to welcome the move if it helps to reduce the inflation pressures.
So, while the dollar remains fairly strong up around CAD1.07 as investors cower in safe havens while the sovereign debt storm blows, there could be a sharp reversal once general global sentiment improves and funds start flowing into riskier markets once again.
Early Thursday, the dollar was down at CAD1.0587 from CAD1.0706 late Wednesday in New York, according to EBS, as global market sentiment relaxed as China has moved to play down a report that it is cutting its exposure to the euro.
The report, which coincided with another story that one of Spain's largest banks, Banco Bilbao Vizcaya Argentaria, might have problems servicing about $1 billion of debt, sent the euro and other risky markets reeling.
However, Beijing has made it clear since then that its path of foreign exchange reserve diversification away from the dollar will not alter.
This helped the euro to bounce back to $1.2310 from $1.2192 late in New York and to Y111.25 from Y109.56. The dollar is also up at Y90.37 from Y89.92.
Like other commodity currencies, the Canadian currency has been suffering from worries over sovereign debt and concern about the global recovery.
The general pullback from risky asset markets has pushed the currency down by more than 5% against its U.S. counterpart over the last few weeks.
See the U.S. dollar's rise against the Canadian dollar:
Click Image to Enlarge
But, now as the Bank of Canada prepares to hike interest rates and the Canadian economy continues to accelerate sharply away from recession, the Canadian dollar looks more like a buy than ever.
This week, the Organization for Economic Cooperation and Development joined calls for the Bank of Canada to start raising rates at its next meeting June 1.
Not only have recent activity data, including retail sales, come in stronger than anticipated but consumer prices indicated that core inflation, as the OECD said, has been "fairly sticky."
Unlike other major countries, including the U.S., Canada can claim quite confidently that its V-shaped recovery is on track.
Canadian banks also give investors some cause for celebration.
Prudent lending means they didn't need the bailouts that many others did during the credit crunch. As a result, Canada hasn't been stuck with some whopping funding bill and the country's deficit--at only 2.7% of GDP--is the lowest in the G7.
China is another good reason to put the Canadian dollar back on the buy list.
As the Peoples' Bank of China looks to diversify its currency reserves out of the dollar, and probably out of a very ill-looking euro too, the Canadian dollar could well stand to benefit.
"The Canadian dollar is not a natural target for the size of flows at China's disposal, but then the latter's re-focusing upon energy security in the past year or so must surely nominate the Canadian currency as a plausible contender," said Neil Mellor, a senior currency strategist with The Bank of New York Mellon in London.
Certainly, any rise in the Canadian dollar back towards parity with the U.S. dollar shouldn't meet with any opposition. If anything, the Bank of Canada is likely to welcome the move if it helps to reduce the inflation pressures.
So, while the dollar remains fairly strong up around CAD1.07 as investors cower in safe havens while the sovereign debt storm blows, there could be a sharp reversal once general global sentiment improves and funds start flowing into riskier markets once again.
Early Thursday, the dollar was down at CAD1.0587 from CAD1.0706 late Wednesday in New York, according to EBS, as global market sentiment relaxed as China has moved to play down a report that it is cutting its exposure to the euro.
The report, which coincided with another story that one of Spain's largest banks, Banco Bilbao Vizcaya Argentaria, might have problems servicing about $1 billion of debt, sent the euro and other risky markets reeling.
However, Beijing has made it clear since then that its path of foreign exchange reserve diversification away from the dollar will not alter.
This helped the euro to bounce back to $1.2310 from $1.2192 late in New York and to Y111.25 from Y109.56. The dollar is also up at Y90.37 from Y89.92.
- 27 May |
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