Canadian Dollar Building a Beachhead Beyond USD Parity

April 14, 2010

The Canadian dollar has strengthened a long way since the first quarter of last year amid improving fundamentals and additional support from the comments of the Bank of Canada Governor and the Finance Minister.  The table below documents high-low U.S. dollar ranges against the loonie for selected periods.  Canada’s currency reached a 23-month high of 0.9949 per USD today.

USD High USD Low
1Q09 1.3064 1.1764
2Q09 1.2718 1.0786
3Q09 1.1724 1.0590
4Q09 1.0958 1.0207
January 2010 1.0695 1.0226
February 1.0780 1.0372
March 1.0573 1.0063
April 1.0161 0.9949


Canada is enjoying strengthening growth and healthier trade, fiscal and labor market trends than the United States.  Real GDP expanded 6.2% at an annualized rate over the last five reported months through January, including advances of 12.4% in industrial production, 11.7% in construction, and 20.7% in wholesale turnover.  Employment in March was 147.5K or 0.9% greater than a year earlier, and the 8.2% unemployment rate is 1.5 percentage points lower than the U.S. jobless rate.  February’s trade surplus of CAD 1.395 billion was the biggest since November 2008.  On-year export growth in January-February of 4.6% eclipsed import growth of 0.6%.  The budget deficit this year will be less than 4% of GDP and about a third of the relative size of the U.S. imbalance.  Ten-year Canadian bond yields are only 13 basis points below U.S. yields, which is roughly only half as much as the average rate spread so far this year.  A corporate survey done by the Bank of Canada and released this week discovered that expected inflation has risen notably, such that two-fifths of respondents expect CPI inflation in the medium term to fall between 2% and 3%, that is higher than the 2% target.  Only half as many respondents had felt that way when the previous survey was taken.

The last of these points puts some teeth behind Bank of Canada Governor Carney’s Delphic reminder on March 25 that the Bank of Canada’s commitment not to raise interest rates before midyear is a conditional promise, resting on economic developments conforming to the Bank’s expectations.  The next two scheduled interest policy announcements are in six days on April 20 and then on June 1.  The latter time especially seems in play for a first rate hike of the tightening cycle, and there’s no way the Fed funds rate is lifted before then.

Finance Minister Flaherty yesterday called the Canadian currency’s rise “orderly.”  From the earliest days of floating exchange rates, describing currency market conditions and trends as orderly or disorderly have been the code language used to indicate if officials find matters acceptable or might be planning action to manipulate markets.  Flaherty’s remark seemed timed to telegraph that it was okay for the Canadian dollar to move past U.S. dollar parity, and he backed up that sentiment by endorsing market-determined exchange rates more generally.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.



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