OTTAWA — The Canadian dollar is back knocking on parity’s door, and this time it may break through and stay.
The loonie jumped sharply Wednesday morning, rising almost a cent to 99.88 cents US as the U.S. greenback again took a beating on currency markets.
Since last reaching parity in April, the loonie has approached the psychological barrier several times, only to fall back each time.
But Scotiabank currency analyst Camilla Sutton said this time may be different, given that the U.S. dollar continues to face pressure and has been falling against most of the world’s currencies as the American economy remains sluggish.
“The U.S. dollar is extraordinarily weak,” she said, “which implies we’ll hover very close to parity for quite awhile.”
The most recent appreciation follows release of minutes from U.S. Federal Reserve officials that suggest the American central bank, which already has a zero interest policy rate, to further ease conditions through buying treasuries — so-called quantitative easing.
That suggests U.S. central bankers are worried about the slow pace of the U.S. recovery and want to provide more cash to help jumpstart stronger growth.
The loonie is also propped up by strong commodity prices, which help energy, mining and agricultural industries, primarily in Western Canada.
The markets have already priced in some kind of quantitative easing announcement on Nov. 3, but Sutton said there are still some unknowns that could cause an even bigger run on the U.S. currency.
“The questions are what it will look like, how broad will it be and how will it be implemented,” she explained.
Last week, former RBC analyst Patricia Croft predicted the Canadian dollar could rise all the way to US$1.15 in the next year, albeit it likely won’t stay there for long.
Sutton won’t go that far, but doesn’t discount the possibility either.
Three years ago, the loonie flew as high $1.10 US, a new record, before diving to less rarefied air.
A rising Canadian dollar will make Canadian exports of everything from auto parts, furniture, newsprint and lumber more expensive to American customers. But it will also cut the costs of Florida oranges, machinery and other imported goods — reducing inflation and making it cheaper for industrial Canada to buy new technology from the United States.
For Canadians planning vacations this winter, a rising loonie will lower trips to sunny destinations in Arizona, Florida and California.
Ironically, while Canadians are fixated on the loonie’s ascent, it really has not done that well compared to other world currencies.
Since June 7, the recent high for the U.S. dollar, the Australian dollar is up about 23 per cent, the euro 17 per cent, and the Japanese yen 12. In comparison, Canada has gained a mere six per cent, analysts note.
“The Canadian dollar is one of the worst performing currencies in the world, except for the U.S.,” said David Watt, a currency strategist with RBC.
The key reason, he said, is that markets believe the Canadian economy will be dragged down by American weakness, since three-quarter of exports head south of the border.
A loonie above par exacerbates export weakness, since it makes Canadian products more expensive in foreign markets.
One likely byproduct of the loonie’s strength is interest rate policy, say analysts.
The Bank of Canada has taken its policy rate from 0.25 per cent in June to one per cent in September, but economists are now nearly unanimous that governor Mark Carney will take a pause at the next meeting date next week, in part to keep the loonie from appreciating further.
Scotiabank economist Derek Holt says he believes Carney could stay on the sidelines for another year.