Is loonie on a comeback climb?
The Bank of Canada raised interest rates in April, while the U.S. stands pat. The result was a big boost to the loonie, which surged to its highest level in four months.
However, before we get too excited, let’s put some perspective on matters.
We’re still talking about a Canadian dollar that is worth less than US$0.64 as this is written. A few years ago, that would have seemed like an unthinkably low. Everything is relative and what was once was cause for despair now has us cheering. That’s how far confidence in our currency has declined!
Not only did the Federal Reserve Board not budge on the U.S. rate, chairman Alan Greenspan also suggested we may not see any movement on that front for some months to come.
In testimony before a Congressional committee in mid-month, he acknowledged that economic prospects look better, but then hedged his optimism by saying the strength of any recovery needs to be “clarified”.
In other words, the Fed still is not convinced that the first quarter strength is sustainable and seems to fear the U.S. economy could lapse back into a slow growth mode, although there has been nouggestion of a slip back to recession.
The chairman seemed especially worried about the possibility of a continued hike in energy prices, which would have a dampening effect on the recovery.
Indicators move slowly
As if to bear out his concerns, the Conference Board reported that its Index of Leading Indicators only moved up 0.1 per cent in March, lower than expected by analysts.
As well, U.S. unemployment insurance claims rose in March, suggesting that the economy is not growing significantly yet, at least in terms of job creation.
The implications of these developments suggest that the stage appears to be set for a continued strengthening of the Canadian dollar in the next few months.
Next page: Canadian economy better
Canadian economy better
Right now, our economy appears to be in better shape than that of the U.S., which is one of the reasons that the Bank of Canada moved. The Bank actually described our recovery as “robust” in announcing the quarter-point hike.
Let’s just hope they weren’t premature with that pronouncement, given the caution being expressed in Washington.
This means we could see one or two more rate hikes before the Fed makes any adjustments. This will increase the spread between the loonie and the greenback, making Canada more attractive to foreign investors who chase interest rates.
If you are a currency speculator (something I never advocate), you may want to make some tactical shifts given this outlook.
If you are a currency hedger (which I do recommend), you may want to make some slight adjustments to your U.S/Canadian currency ratios, perhaps a 5 to 10 per cent shift towards the loonie, but nothing dramatic.
Remember, currency movements are notoriously unpredictable. What seems like a clear pattern one week can be turned upside down the next week by events. So never take anything for granted.
This article originally appeared in the Internet Wealth Builder.