C$ losing global edge, still strong vs greenback
Reuters, 18 May 2006
By Cameron French
TORONTO (Reuters) - The Canadian dollar is losing its edge against most world currencies as North American interest rates stop rising and oil and metals prices ease, but it could still extend its climb beyond recent 28-year highs versus the greenback.
The currency, known as the loonie for the picture of the loon on the one-dollar coin, was the top performer of Group of Seven currencies in 2005, helped by strong commodity prices and steadily rising domestic interest rates. It rose further against the U.S. dollar this year, charging above 90 U.S. cents for the first time since 1978 to touch a high of C$1.0975, or 91.12 U.S. cents on May 9. Some spoke seriously about the prospect of parity between the two currencies.
But with the outlook for commodity prices uncertain and the Bank of Canada poised to stop raising rates, any further gains will likely reflect U.S. economic troubles and their impact on the U.S. dollar, while the loonie will keep falling against currencies like the euro and the yen.
"We've moved to a period of time where Canada's moving out of the spotlight. It's like the action is done," said David Powell, currency analyst at IDEAglobal. Powell expects the Canadian dollar to rise further against the greenback this year. But he says that will reflect pressure on the U.S. dollar from a yawning current account deficit and expectations that U.S. interest rates have peaked.
DIFFERENT PICTURES
The picture looks different elsewhere in the world, where the euro zone has already started raising interest rates and Japan looks set to abandon its zero-interest-rate policy.
The Canadian dollar has already pulled back against the euro, the pound and the yen after strong gains last year, and George Davis, chief technical strategist at RBC Capital Markets, said technical and fundamental indicators suggest the retreat should only deepen.
"I think from a medium to longer term perspective, valuations for the Canadian dollar are extremely overbought," he said. "You've almost got a reversal of the scenario where last year we saw the Bank of Canada start to progress through its tightening cycle, while all the other global central banks apart from the Fed basically stood pat."
Investors racing to take advantage of the Canadian dollar's positive exposure to energy and metals prices may also have gotten ahead of themselves, as metals start what could become a long correction. The Canadian dollar was around C$1.1202 to the U.S. dollar, or 89.28 U.S. cents, on Thursday after a tame April inflation report suggested the Bank of Canada will raise rates at most once more. The currency was at C$1.4360 to the euro, while it was C$2.1183 against the pound and at 98.85 yen. At the start of last year the Canadian dollar was at C$1.6306 to the euro, C$2.3075 to the pound and at 85.10 yen. The loonie's recent gains have also prompted speculators to bet on its one-way movement, and as fundamentals shift, they could unwind those bets quickly.
"While the Canadian dollar needs to be firm and robust, the acceleration that we've seen has got to dissipate," said Amarjit Sahota, head of global research at HIFX in San Francisco. "That's really apparent when you look at the IMM (currency futures) data, on how long the speculative community is on Canadian dollars, and we'd expect that to (come off)."
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