The Canadian dollar has taken flight during the past month right in the heart of the recession, ranking first among the world's 16 major currencies - up 6.6 per cent - against the U.S. dollar.
The loonie soared to its highest level since October, reaching 92.77 cents (U.S.) early yesterday against the greenback before settling back, according to Bloomberg.
For investors, the takeaway from the currency's move might well be that the global economic recovery is on track given the rise in commodity prices. Perhaps more surprisingly, there is also a growing expectation among speculators that the U.S. economy could soon take the lead.
"The Canadian dollar is so highly tied to global growth," said Camilla Sutton, a currency strategist with Scotia Capital Inc. It is also tied to the performance of the U.S. economy, she said. Currency traders, Ms. Sutton said, are "betting the U.S. recovery will spark the global recovery and Canada will be a beneficiary of that."
So far, it has been Asia - led by China - that has fuelled the turnaround. That has helped the Australian dollar, which, like Canada's, is a commodity-linked currency, rise 19 per cent against the greenback on a year-over-year basis. The loonie has been a relative laggard, climbing only 13 per cent.
Amid all the volatility, the Canadian dollar has been luring traders looking for riskier opportunities.
"The trend is very strong across a group of currencies for a weaker U.S. dollar," Ms. Sutton said. "[But] the Canadian dollar right now is overreacting on the downside and the upside."
The weakest currencies this year have been in such safe-haven countries as the United States, Japan and Switzerland, reflecting the willingness of currency traders to take on added risk.
"All in all, with almost everything going its way these days (besides the crummy weather and the impact on tourism), a return trip to parity - last visited nearly one year ago - doesn't seem far fetched," Sal Guatieri, a senior economist with BMO Nesbitt Burns Inc., said in a note to clients.
BMO Nesbitt Burns expects the loonie could reach parity with the U.S. dollar by the end of next year. There is increased confidence in Canada's economic potential and the likelihood that commodity prices will continue to rise as the global economy improves, Mr. Guatieri said.
"We will also not have to deleverage as much as American households and domestic demand in Canada should remain relatively strong," he said.
Although speculation continues over the possibility of the Bank of Canada intervening in the currency market, many think that is unlikely because the loonie, like most other currencies around the world, is simply reflecting the weakness in the U.S. dollar. On a year-to-date basis, the move in the loonie lies in the middle of the moves made by the world's major currencies.
"At the best, direct intervention is a temporary measure that can take a little of the edge off the move on the Canadian dollar, but is very unlikely to really change the realities of the foreign exchange market," said Stewart Hall, a currency and fixed-income strategist with HSBC Securities Canada Inc.
