The Loonie

Earlier National Bank LOWERED residential mortgage rates. This - coupled with a cooler than expected CORE inflation figure and some pull back in the Loonie - prompted my CIO to assert that the B of C will lower interest rates in a series of cuts and cause the dollar to fall back down to the low $0.90s. I disagree and wanted to engage some of you in a discussion at to the direction of the Loonie. I say it’s going to $1.14 and I do not believe that a core CPI figure coming in at a lower than expected clip will prompt rate cuts by the B of C. Secondly, I believe the cuts in residential mortgage rates are simply a strategy desiged to sell more mortgages and increase the banks net operating income what do you guys think willy

I agree with you that a low CPI figure will not trigger a rate cut, but we’re likely to see one anyways, just to keep the Loonie in check, so in a sense, I’m also agreeing with your CIO here. I’m interested to hear what fundamentals you’re seeing, which will take the Loonie to 1.14. The CAD economy is already hurting badly from the sudden rise up… add to that the fact that everyone and their mother is running south of the border to do all their xmas shopping and you’ve got a really bad situation for Canadian manufacturing, exporters and retailers. The only sectors I see continuing in strength are energy, basic materials and maybe tech (i.e. tech services, etc.), but these are going to impact local economies more than the national average (i.e. Alberta and Vancouver may be good, but the East is going to get killed).

I would tend to agree with your CIO. I think by the end of next year we should see it levelling off in the $.90 range. I guess it depends on what you use to gauge the price of a currency? If you hold to the purchasing power parity theory then it should be in the 80 - 85 cent range. If you’re going purely off of it being a commodity currency (much like New Zealand, S. America, etc) then it may continue to hold above parity depending on what the growth is like coming out of China, India and the like. I think you’re going to see a slowdown in global growth so that will obviously impact the CDN dollar. Will Dodge or his successor cut interest rates? I think they have to do a quarter point at the next meeting just to appease the masses. I don’t know if it’s the right move but I liked what I heard from Duguay today speaking in Quebec City about what the BofC is thinking.

See what I think is that because Canada’s once iron clad link to the strength of the US economy is less than decades gone by, ex-North American growth in demand for commodities will help power the Loonie to the $1.14 and $1.20. Those are just technical levels on a chart but what I view is that the Loonie will be flying high above the Eagle for some time and I do not agree with my CIO since Dodge really doesn’t have that much gun powered left to CUT rates given a decline in the GST already having happened. Thoughts? Willy

WillyR Wrote: ------------------------------------------------------- > See what I think is that because Canada’s once > iron clad link to the strength of the US economy > is less than decades gone by, ex-North American > growth in demand for commodities will help power > the Loonie to the $1.14 and $1.20. Those are just > technical levels on a chart but what I view is > that the Loonie will be flying high above the > Eagle for some time and I do not agree with my CIO > since Dodge really doesn’t have that much gun > powered left to CUT rates given a decline in the > GST already having happened. > > Thoughts? > > Willy I would be in your camp. I think the Bank will likely cut rates once or twice to appease the east, inevitabely the cannot cut more than a few times until something is done about inflation in the west. The fed on the other hand could easily cut another 75-100 bps before they are done. There are other factors at work here as well; although I don’t want to say that we have completly decoupled from the US economy (of course not), we are less reliant on it than a decade ago. If you believe that China and India will continue to grow rapidly and hence have high demand for energy and base metals, then you should believe in a strong loonie. If you believe that the subprime/over extension of the US consumer is likely to get worse before it gets better, your should believe in a strong loonie. If you believe that China, Japan and the gulf states will continue to move away from dollar pegs and growing their USD reserves (not selling their existing ones mind you) than you should believe in a strong loonie.

May-be I’m just getting old and crotchety but I just don’t see the Loonie cooling off in a secular way. This is a head fake or a cooling break…it’s catching it’s breath. My two cents… Willy

I think where we differ here is not on whether a strong Loonie is supportable or not… I think we’re all in agreement that it is. Rather, it is our respective definitions of what level constitutes a strong Loonie. For me, parity or thereabouts meets the definition and 1.14-1.20 is exceedingly strong to the point that it is an unsustainable level. We have to keep in mind here that it really wasn’t very long ago that 1.25-1.30 was the norm and that the run up to parity came at a much quicker pace than most, if not all of us, expected. I also agree that the fundamental factors discussed here are valid, but I disagree on the extent to which you feel ties with the US have diminished. They haven’t. I haven’t conducted any polls myself, but I’m relatively confident that if you were to ask the average SME business owner where they do their majority of exporting to, it would still be the US. Granted, India and China are growing quickly, but they are still a net exporter to the US and to Canada, which doesn’t support the Loonie at 1.14-1.20.

the fed’s debasing the USD and it’s the price of commodities driving the Loonie

^ | exactly. Its not just the strength of the cdn $ thats caused this shift, but the US economic woes and the actions of the fed. that the currency traders have taken to calling the canadian dollar the ‘petro-buck’ (which is admittedly much cooler sounding than ‘the loonie’, and i love calling our dollar the loonie…) makes me think that long term our dollar will be moving much more inline with oil prices. there is very little the B of C can do, even with rate cuts, to truely cool the demand for our currency due to the demand for our oil.

The term ‘petro-buck’ has been around for a couple of years now, so this is old news… nothing to make the Loonie move another 20bps. In terms of strength of the CND$… compare it to the Euro or the Pound over the past year… how’s it been doing? That’ll give you a much better indicator of the real strength of the Loonie. I’ll save you the trouble… it’s flat against the EUR and only done slightly better against the Pound. Nothing to move the needle in terms of relative global positioning or strength. The fact is that the moves the CND$ is making against the greenback is mostly due to the devaluing of the dollar and only partially due to oil.

exactly. Hence, there is no reason to think it will go back to 0.9 as alot of people feel it will.

darkhelmet Wrote: ------------------------------------------------------- > The term ‘petro-buck’ has been around for a couple > of years now, so this is old news… nothing to > make the Loonie move another 20bps. > When the term was coined a couple years ago, oil was at $60. Now its at $98. You don’t think that has contributed to its rise against the $US, especially given that Canada is now the #1 supplier of oil to the States??

Okay darkhelmut where are you getting this from? I have the Loonie up… 14% vs. the Greenback 11% vs. the Yen 12% vs. the Pound 8% vs. the Euro I’m sure these figures are off slightly in terms of the recent “head fake” move we’ve seen in the Loonie but the Loonie’s strength seems impressive AND broadly based. Willy

As far as im concerned inflation particularly in the west is still a major concern, I dont think the current core numbers reflect this. Overall the economy is in a net positive position regardless of whats happening to manufacturing in Ontario and Quebec, there is no real reason to cut interest rates especially in the face of rising inflation in the rest of the world that can easily find itself imported into Canada. Id also be willing to bet that cutting interest rates would have an negligible impact on the loonie. The USD is getting smashed because of all the structural imbalances that have built up in the US economy and the expectation that these problems will continue and possibly lead to a recession. In light of continuing high commodity prices and the aforementioned problems in the united states I dont see a .25 bip cut by B of C having that much of an effect on the Loonie.

WillyR Wrote: ------------------------------------------------------- > Okay darkhelmut where are you getting this from? I > have the Loonie up… > > 14% vs. the Greenback > 11% vs. the Yen > 12% vs. the Pound > 8% vs. the Euro > > I’m sure these figures are off slightly in terms > of the recent “head fake” move we’ve seen in the > Loonie but the Loonie’s strength seems impressive > AND broadly based. > > Willy I’m pulling my numbers off Google charts… using 1Y charts. If I use YTD, I get the same figures you do.

SeanC Wrote: ------------------------------------------------------- > As far as im concerned inflation particularly in > the west is still a major concern, I dont think > the current core numbers reflect this. Overall > the economy is in a net positive position > regardless of whats happening to manufacturing in > Ontario and Quebec, there is no real reason to cut > interest rates especially in the face of rising > inflation in the rest of the world that can easily > find itself imported into Canada. actually was reading an article today in the post about how the rise in the loonie has had a dampening affect on inflation in Canada since its dropped the cost of goods imported from the states (ie. fresh produce, cars, manufactured goods) considerably, and will continue to do so if it stays where its at.

Hi Guys Please suggest me , what is the good time to exchange US dollars into Canadian Dollars. I am a Canadian working in USA. I am in wrong place wrong time, people used to get 1 US dollar earned into 1.75 or 1.5 canadian dollars, now I am in the other side Your Opinion is strongly welcome.

Dakshinabula, why don’t you read what the CFAI curriculum says about currency strategies, strengths & weaknesses, etc. That was one of the best parts of the 2007 level 3 curriculum, imho.

well they gone and cut rates. Still, I think most of that cut was likely built into the FX rate, so I doubt we’ll see the Loonie fall too far. The Fed has far deeper cutting left to do than the BOC. I still like Loonie long term, though probably not as much as the Yuan, Gulf currencies and the some of the deeper commodity play ones (ie AUD, ZAR and BRL).

Well it’s down $0.0138 so far. If you look at what BA’s are going for right now, it’s already pricing in another 50 bps cut or so by June.