Canadian Dollar Once Again Closing in on US Dollar Parity

On September 19th, the Canadian dollar reached parity with its US counterpart for the first time in 31 years. The “loonie” as the Canadian dollar is known, was not able to maintain its dominance over the US dollar in the face of the surging economic crisis, and less than a year later, was trading in the more familiar 85 cent US range.

And for Canada, that is a good thing. Canada’s economic well-being is tied to its exports – particularly oil and commodities including lumber and minerals – and every uptick in the Canadian dollar, makes the country’s exports more expensive and results in weaker demand.

Lately, however, the loonie is once again on the move, having picked up almost eight cents on the US dollar during the month of July. Indeed, most of the major currencies have gained on the American buck, but none so dramatically as the Canadian dollar which is benefiting from a renewed optimism that the worst of the global recession is behind us. As a supplier of commodities for which demand is likely to increase as economies start to recover, Canada is uniquely positioned to benefit earlier, and to a greater extent, than most other G8 countries as the pall of recession lifts. It is for these reasons that currency traders are turning to the loonie at the expense of the US dollar.

This morning, the loonie was valued at roughly 93 cents US, and some analysts are predicting parity by the end of the year. Such talk is causing great concern for Canada’s Finance Minister, Jim Flaherty and Bank of Canada Governor, Mark Carney, and both men have hinted in the past two days that direct intervention may be necessary to protect Canada’s exports from a rapidly appreciating Canadian dollar.

At the last rate setting meeting, Carney pledged to hold Canada’s benchmark interest rate at the current 0.25 percent level until the middle of next year. With interest rates so low already, not much could be gained by a further cut anyhow; which is why Carney has hinted that the Bank of Canada is prepared to engage in quantitative easing if necessary. By selling Canadian dollars in a bid to over-supply the market, the hope is that this will push down demand for the loonie, alleviating the upwards pressure on the exchange rate.

So far, comments by the Finance Minister and the Governor have had little affect on the loonie’s rise and it is almost as if the market is calling the government’s bluff. With one commentator after another touting the loonie as the best currency bet going these days, demand for the loonie is sure to continue despite attempts by the government and the Bank of Canada to slow the loonie’s ascent.

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