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Why the Canadian dollar has been crushed this week Add to ...

These are stories Report on Business is following Thursday, May 16, 2013.

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Loonie erodes
The erosion of the loonie picked up steam today, extending its loss over the course of a week to more than 2.5 cents, largely on U.S. issues but exacerbated by Canada's latest inflation reading.

The currency hit a low this morning of 96.97 cents U.S., before regaining some ground, marking a loss at its low point of 2.9 per cent since hitting 99.86 cents last Thursday.

It’s not just that commodity-based currencies are being hit - gold, for example, continues to slip - but also what developments in the United States mean to its northern neighbour, said chief currency strategist Camilla Sutton of Bank of Nova Scotia.

Just yesterday, for example, the U.S. Commerce Department reported that housing starts across America plunged 16.5 per cent in April.

The U.S. housing market has been picking up, and any sign of a construction slowdown could hurt Canadian lumber exports, Ms. Sutton.

It also could signal other broader issues that tend to wash up on Canada’s shores given the relationship to the U.S. economy.

Comments by a Federal Reserve official didn’t help.

John Williams, president of the Federal Reserve Bank of San Francisco, in a speech in Portland, Ore., yesterday, raised the prospect of the U.S. central bank’s bond-buying stimulus beginning to taper off within a few months.

So several developments are helping the U.S. dollar to rise, acting at the same time against the loonie, as Canada's dollar coin is known, Ms. Sutton said.

Driving it lower today was the exceptionally tame reading on inflation, which suggests the Bank of Canada is a long way off from hiking interest rates.

“Today’s dollar rally tells us a lot about the psyche of investors and maybe about the future,” Jonathan Lewis, chief investment officer at Samson Capital Advisors in New York, said of the greenback.

“First, this is no safe haven rally – at least not yet despite looming geopolitical concerns,” he added.

“The dollar is up, but treasuries are down. And the yen – safe haven relic of times gone by – it’s not doing too well today either. Stronger economic data, stocks up, gold down – this is beginning to feel like a traditional dollar rally.”

As to exactly what’s going on in the currency markets, Samson’s Mr. Lewis said investors shouldn’t expect “every loose end to be tied up,” given the global uncertainty.

“If the dollar is rallying, because the U.S. economy is strengthening, where is Canada in this story?” he said.

“It’s one of the worst performers of G10 currencies today,” he said in a research note.

“Ordinarily, we might expect the Canadian dollar to benefit from an accelerating U.S. economy. If the U.S. economy is doing better, what about growth-related currencies in the G10? Australian and New Zealand dollars are both down significantly. Perhaps this reflects concerns about China slowdown, or their own decelerating economies, but if the U.S. is accelerating, it seems a bit overdone.”

At least some of the loonie’s weakness of late could continue. Adam Cole of Royal Bank of Canada noted a “seasonal tendency” for the currency to weaken in June.

“The evidence suggests this is associated with a heavy concentration of bond maturities and coupons in the month and a tendency for at least part of the cash flow to ‘leak’ out of CAD,” he said, referring to the currency by its symbol.

Inflation eases
Inflation in Canada now stands at just 0.4 per cent, the lowest since the fall of 2009, largely because of a drop in gasoline prices.

The annual pace of inflation slipped in April from 1 per cent in March on the back of 6-per-cent decline in pump prices from a year earlier, The Globe and Mail's Bertrand Marotte reports.

That marked the fastest fall in gas prices since October, 2009, Statistics Canada said today.

But even stripping out gas, consumer prices were up just 0.8 per cent last month, down from March’s 1.1 per cent.

"The headline inflation rate marked a stark deceleration from the prior month’s 1-per-cent pace, and is the lowest inflation rate since the recessionary period," said Emanuella Enenajor of CIBC World Markets.

Food and shelter costs were rose over the course of the year, preventing inflation from dropping further.

On a monthly, seasonally adjusted basis, consumer prices across Canada dipped 0.4 per cent in April from March.

British Columbia, home to Canada's weakest housing market, now also boasts the weakest showing on this front, as well.

Given the death of the harmonized sales tax and province's return to the provincial sales tax, prices were down in April by 0.8 per cent from a year earlier.

"But even the country's hottest economies are seeing bening price trends, with [the consumer price index] up 1.3 per cent y/y and 1 per cent y/y in Alberta and Saskatchewan, respectively," said senior economist Robert Kavcic of BMO Nesbitt Burns.

So-called core prices, which exclude volatile items like gas and help guide the Bank of Canada, rose 1.1 per cent across the country, down from 1.4 per cent in March.

Both total and core inflation are below what economists had projected.

The Bank of Canada, which targets an inflation rate of 2 per cent, hadn't expected to actually hit that level for some time yet. But today's numbers underscore the lack of any pressure on the central bank to raise rates any time soon. Indeed, economists expect it will be late 2014 or early 2015 before it does.

"Over all, a set of figures suggesting inflationary pressures remain well under wraps in Canada, removing any pressure on the bank to raise rates this year, even with the recent signs of modest economic improvement at the start of the year," Ms. Enenajor said of the report.

Markets rise
Global stock markets climbed today, setting the stage for a nice end to the week as Canada heads into a long weekend.

And, hey, the folks in Ontario no longer have to worry about a strike shutting down the province’s liquor outlets, given a tentative deal late yesterday between union and management. And anyway, watching Canadian politics may prove to be a lot more fun today than watching the markets.

Tokyo’s Nikkei gained 0.7 per cent today, while Hong Kong’s Hang Seng was closed.

In Europe, London’s FTSE 100, Germany’s DAX and the Paris CAC-40 were up by between 0.3 per cent and 0.6 per cent. The optimism then spread to North American markets.

“The end of the week looms and the picture for markets looks very similar on Friday afternoon to how it did on Monday morning: a relatively benign economic environment, showing some signs of recovery, backed by accommodative central banks,” said market analyst Chris Beauchamp of IG in London.

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