Loonie powers over $1.08
Tuesday, November 06, 2007
The Canadian dollar vaulted over the $1.08 (U.S.) mark to a record on Tuesday, prompting a chorus of analysts to declare the currency is overextended.
The currency extended gains Tuesday afternoon after Bank of Canada Senior Deputy Governor Paul Jenkins dashed expectations of an interest-rate cut. The currency closed the day at a new high of $1.0852, up 1.34 cents. Mr. Jenkins' comments came as oil touched an intraday record of $97.10 a barrel while investors continued to shun the U.S. currency.
The latest run brings the loonie's run to 6.6 per cent in the past month alone, making it the world's top-performing major currency. Oil prices are helping, but the currency is now trading well beyond fundamental factors.
“It's overvalued,” said Rebecca Patterson, global currency strategist at JP Morgan in New York. She's advising her clients that the loonie will slide over the next year.
A variety of measures suggest the currency's rise is overdone, she said. A 10-year moving average of the exchange rates shows the loonie is about 10 per cent overvalued, while a trade-weighted analysis against a basket of Canada's trading partners shows the dollar is about 20 per cent higher than it should be.
A Bank of Canada-based model that uses interest rate differentials and commodity prices to determine fair value shows the currency is 10 per cent overvalued, said David Powell, currency strategist at Idea Global in New York.
“The Canadian dollar is well overvalued by most conventional measures,” he said. About two-fifths of the U.S. dollar's decline against the Canadian currency is due to general U.S.-dollar weakness, he estimated.
Oil prices are helping fuel the gains. Oil, itself driven by speculative buying, rose above $97 a barrel amid tight supplies. The U.S. dollar, meantime, hit another record low against the euro.
Virtually everyone believes the loonie has risen so much, so fast, that the currency will likely lose steam in the coming months.
“The loonie is grossly overvalued and investors looking to take advantage of this [appreciation] should move quickly,” said Andrew Pyle, investment executive at ScotiaMcLeod in a note.
In the near term, however, the loonie could hit $1.12, Bank of Nova Scotia forecast Monday.
The speedy rise in the currency is hurting many companies.
Rona Inc., a Canadian home-improvement retailer, said Tuesday the appreciation appears to be encouraging Canadian consumers to delay home renovation projects in favour of travelling abroad.
Manulife Financial's chief financial officer Peter Rubenovitch said Tuesday earnings growth was affected by “the negative impact of lower interest rates and the strengthening of the Canadian dollar.”
Not everyone is being harmed, however.
Nortel had a $67-million (U.S.) foreign exchange gain in the third quarter, helping it post a profit. There are a number of inter-company accounts in Canadian dollars, and they gained in value as the currency rose, Nortel's interim chief financial officer David Drinkwater explained in a phone interview.
Mr. Jenkins, meantime, indicated in a speech in New York the central bank will not cut its interest rate despite the loonie's climb.
“We judge that the risks to the bank's inflation projection are roughly balanced,” Mr. Jenkins said, adding that there is a slight tilt to the downside.
The Canadian dollar's rise is outside the “normal bounds,” Mr. Jenkins added in a question-and-answer session after the speech.
With a file from reporter Catherine McLean.