Globe and Mail Update
November 5, 2007 at 5:48 PM EST
The unflappable Canadian dollar brushed aside falling oil prices and pushed higher into record territory Monday, with a new forecast calling for it to reach $1.12 (U.S.) in the coming months.
Surging commodity prices helped the loonie hit a major milestone last week, when it topped the Bank of Canada's previous official record high of $1.0614 set on Aug. 20, 1957. A number of economists and currency strategists revised their forecasts after last week's move, and although many say the currency is now above its suggested fair value, they agree that conditions seem ripe for further gains.
“The Canadian dollar is well positioned to extend current gains to peak at around $1.12 over the next two quarters,” Bank of Nova Scotia projected in a report Monday.
The loonie is being supported by a variety of factors, Scotiabank said, including a persistent weakness in the U.S. currency, speculative buying, strong commodity prices – particularly for crude oil – and the prospect of lower U.S. interest rates at a time when the Bank of Canada is expected to stand pat.
Canadian dollar continues to hover in record high territory, holding steady above $1.07 (U.S.). (CP)Royal Bank of Canada raised its forecast for the Canadian currency on Friday, saying it will appreciate to around $1.08 before declining below parity with the U.S. dollar in the second half of next year.
The Canadian dollar has outperformed all other major currencies this year, rising 25 per cent against the greenback in 2007 and 5 per cent in the past month alone. It climbed even further Monday, finishing the session at $1.0718, up a smidgen from $1.0704 on Friday.
Douglas Porter, deputy chief economist at BMO Nesbitt Burns, said everyone is talking about how much higher the loonie can go, and how quickly it can get there. “Having now broken above $1.07, the currency is in uncharted territory and still has the wind at its back,” he said.
The dollar initially weakened Monday as crude oil prices eased below $94 a barrel. Increased risk-aversion also gripped markets after Citigroup Inc. warned of billions more in loan losses and the resignation of its chief executive officer Charles Prince fuelled fears of further fallout from the subprime lending debacle.
Despite oil's decline Monday, commodity prices are still at record highs and the U.S. dollar shows no signs of breaking out of its funk.
“All that can be said on that front is that the currency has been on a one-way trip north for five years, and the two big drivers – strong commodities and a weak U.S. dollar – are still very much in place,” Mr. Porter said. He noted that currency markets have a tendency to overshoot – “sometimes for years on end and sometimes wildly so” – to levels above those that seem reasonable by any traditional economic measures.
Mr. Porter expects the Canadian dollar will reach $1.10 early next year, before pulling back to the 90- to 95-cent range.
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