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Longer term expect the Canadian dollar to weaken vs the U.S. dollar

Posted by WorldWideMarkets . on May 30, 2013 3:05:00 AM

Loonie resized 600The Canadian dollar was up ahead of the Bank of Canada’s interest rate announcement and gained a little more after the central bank said on  Wednesday its next move would be a rate hike rather than a cut. It was the last meeting under Mark Carney and extended the three-year rate freeze at 1 percent, the longest period of non adjustment since the 50s. The accompanying guidance was identical to last month and while some economists had said it was time to drop the tightening bias, the BOC at least was undeterred. While the Canadian central bank marches to its own beat, the Canadian economy is always impacted by the U.S. being it's largest trading partner. A lower Canadian dollar vis-a-vis the U.S. unit would be good for Canadian exports and with inflation at 0.4 percent, well below the BOC's target of 1 to 3 percent, one can't help thinking the BOC would rather the Fed end its easing cycle first. Higher Canadian rates relative to the U.S. would reflect higher risk and not necessarily attract investment inflows if U.S. yields were only marginally lower but with lower comparative risk in the world's largest economy. The U.S. dollar has gained 4.4 percent against the loonie this year. but is still around parity. It was only a dozen years ago that the loonie was about 70 U.s. cents and Canadians weren't complaining then. If the U.S. economy and dollar has turned, longer term, the loonie will return to historical trends. Near term, more depends on U.S. dollar volatility than the Canadian dollar sentiment. 

 

 

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