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Loonie's 'new world': Is the Canadian dollar overvalued? Add to ...

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Is loonie overvalued? The Canadian dollar continues to trade above $1.01 today, reflecting what Finance Minister Jim Flaherty calls "the new world." But there's something of a debate over whether the loonie may be overvalued.

Mr. Flaherty said yesterday that the loonie's strength is to be expected given Canada's fiscal standing in the world and concerns over Europe's debt crisis.

"This is the new world," he told reporters. "It would be unreasonable given those fundamentals for anyone in Canada to expect the Canadian dollar to go back to the days when the Canadian dollar was so significantly devalued vis-a-vis the U.S. dollar."

The currency is expected to remain around par for quite some time, though some observers believe it's trading above where it should be.

"Certainly against the U.S. dollar, the Canadian is looking a little stretched here," Shaun Osborne, chief currency strategist at TD Securities, told the Reuters news agency, predicting the loonie will slip back to parity. "We need to see something that justifies this strength, either by way of higher rates or another push up in commodity prices. We haven't really seen anything new ... over the last few weeks that would justify this strength in the Canadian dollar being sustained."

But currency strategist Camilla Sutton of Scotia Capital believes that, while the currency hasn't strengthened just on fundamentals, there are many reasons for it to be deemed fairly valued. Investors are looking for alternatives to the U.S. dollar and euro, she said, while Canada's fiscal standing is seen as strong.

BMO Nesbitt Burns deputy chief economist said the loonie is probably not yet strong enough to affect the Bank of Canada or the outlook for interest rates. The central bank's latest projection for the dollar was that it would average 98 cents in the current quarter but that oil prices would average $84 (U.S.).

"My old rule of thumb is that for every $10 rise in oil price, the C$ should rise 3 to 5 cents - and the overshoot in oil 'should' leave the currency at $1.01," Mr. Porter said.

"Having said all that, the bank is no doubt leery about inflaming the currency's furious start to 2011, and will likely temper any hawkish noises in next week's rate announcement and [monetary policy report]"

Target comes to Canada Target Corp. is grabbing up most of the Zellers stores in Canada from parent Hudson's Bay, a $1.8-billion deal that promises to transform the domestic retail landscape, The Globe and Mail's Marina Strauss reports today.

Target will open 100 to 150 stores in 2013 and 2014.

The agreement will be industry-changing because Zellers store leases will now be auctioned off to an array of other retailers

Spain, Italy see success at debt sales Like Portugal yesterday, Spain and Italy pulled off successful bond auctions today, though questions remain on the outlook for the embattled euro zone, as does speculation that Portugal will be the next country to seek a bailout.

Some analysts point to the European Central Bank's purchase of bonds earlier this week as helping to bring down yields. Markets have also been buoyed by pledges from China and Japan to support Europe's crisis plans by also buying debt. That, too, raises questions.

"Will the ECB, China and Japan et al be undertaking to buy every piece of worthless peripheral European debt that there is?," said CMC Markets analyst Michael Hewson. "If they do they are going to need a very big shovel, and given that France and Germany are against any rapid increase in the bailout fund that doesn't look likely."

The auctions today came as both the ECB and the Bank of England held interest rates steady at their policy meetings.

Rating agencies warn U.S. Are Europe's troubles keeping the United States off the radar?

Both Moody's Investors Service and Standard & Poor's Corp. issued warnings today on U.S. credit ratings. Moody's said the U.S. will have to deal with its swelling debt if it wants to keep its triple-A rating, while S&P, whose French chief spoke at a conference today, warned it could change its outlook.

"The problems in Europe are providing a shield of cover for the problems in the U.S.," said Scotia Capital's Ms. Sutton.

"... As we move into the spring the debt ceiling (currently at $14.3-trillion) will need to be raised, which could focus attention on the fiscal problems the U.S. faces. Our core view is that the market will grow increasingly inpatient with the lack of fiscal repair in the U.S. and later this year will begin to put significant downward pressure on the [U.S. dollar]"

U.S. foreclosures top 1 million The United States has hit an ugly milestone: The number of homes repossessed hit more than 1 million last year.

RealtyTrac in the United States said that's the largest number of evictions on its records that date back to 2005. Analysts expect the number to be even higher this year.

Foreclosures fell late in the year as some banks put evictions on hold while in the midst of a controversy over the process.

The total number of foreclosure filings - default, notices, scheduled auctions and actual repossessions - hit a record 2.87 million, up almost 2 per cent from 2009 and 23 per cent from 2008. Here's a key number: 2.23 per cent of all U.S. housing units, or one in 45, received at least one foreclosure filing during the year.

"Total properties receiving foreclosure filings would have easily exceeded 3 million in 2010 had it not been for the fourth-quarter drop in foreclosure activity," said chief executive officer James Saccacio of RealtyTrac.

Fretting over capital flows Policy makers are increasing troubled by the flood of international capital the world's major emerging economies, Globe and Mail Washington correspondent Kevin Carmichael reports today.

"Capital inflows into some middle-income countries have placed undue and potentially damaging upward pressure on currencies," the World Bank says in its latest global economic outlook. "Many of these flows are short-lived, volatile and sometimes speculative in nature. Left unchecked, such flows can lead to abrupt real appreciations and depreciations that are out of line with underlying fundamentals, and can do lasting damage to economies."

Trade deficit narrows Canada's trade deficit narrowed in November to $81-million, down sharply from the $1.5-billion shortfall a month earlier.

Exports climbed 0.8 per cent, but that was on rising prices as volumes actually slipped by 2 per cent, Statistics Canada said today. Imports fell by 3.2 per cent, with both volumes and prices down.

"The mix of goods being exported out of Canada has shifted away from consumer-related goods to resource-based goods," noted Toronto-Dominion Bank economist Diana Petramala.

"The destination of Canadian goods is also changing. Canadian exports still predominately go south of the border, but the U.S. market only accounts for around 70 per cent of Canadian exports, the lowest share since the early 1980s, and down from 80 per cent prior to the start of the U.S. crisis. A strong Canadian dollar (which is currently sitting just above parity) has eroded the competitiveness of Canadian made-goods in U.S. markets."

U.S. trade deficit shrinks The U.S. trade deficit also narrowed in November, coming in at its lowest in almost year, as the weaker greenback helped spur exports.

The U.S. trade deficit was $38.3-billion (U.S.), compared to $38.4-billion a month earlier.

Exports climbed 0.8 per cent, and imports 0.6 per cent.

"Nominal exports rose for the third straight month, the longest winning streak since the calendar turned from 2009 to 2010," said Jonathan Basile, director of economics at Credit Suisse in New York. "And the gain was relatively broad based."

Cogeco results mixed Montreal-based cable company Cogeco Cable Inc. today reported mixed earnings in line with analysts' expectations, with profit dropping by about 40 per cent despite stable subscriber growth, The Globe and Mail's Iain Marlow reports.

The steep fall off in profit to $33.6-million in the first fiscal quarter of 2011, down from $56.7-million in the same quarter last year, was the result of a one-time favourable income tax adjustment last year. Earnings per share were down from $1.15 last year to $0.69 in the quarter, but adjusted earnings were up about 25 per cent from $0.55 to $0.69, which beat analysts' expectations.

In Personal Finance today

Though the RRSP tax refund is tempting, it could trigger clawbacks when you retire, writes Personal Finance columnist Rob Carrick.

When you're a U.S. citizen living in Canada, tax planning raises issues to think about. Tax Matters columnist Tim Cestnick explains how cross-border filing works.

In today's Report on Business

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