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Fed stimulus hopes help push Canadian dollar to best level in a year

Loonie edges lower along with commodities

JONATHAN HAYWARD/THE CANADIAN PRESS

The Canadian dollar on Monday closed at a one-year high against the U.S. currency, partly because Canada is increasingly viewed as one of the few safe havens in a world beset by debt and stagnation.

But the currency has also benefited from the growing conviction that the U.S. Federal Reserve will embark on more stimulus measures, higher metal prices and indications the Bank of Canada is more likely to raise interest rates than cut them.

The commodity-sensitive loonie was off the best levels of the day but still closed up 0.07 of a cent to $1.023 (U.S.), its highest level since Sept. 1, 2011, after moving as high as $1.0251.

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"More and more global investors are seeing Canada as one of the shrinking number of real, or true safe haven countries out there and they're buying our debt instruments and that's supporting our currency," said Sal Guatieri, senior economist at BMO Capital Markets.

Of course, the higher dollar is not unvarnished good news.

It's great for holiday makers who want to buy cheaper U.S. dollars and also take advantage of the higher duty-free exemptions that kicked in June 1.

It's not so great for exporters and retailers.

"There's no doubt a strong Canadian dollar poses challenges to Canadian retailers, especially given the growing trend of Canadians to shop abroad," said Mr. Guatieri.

"Similar to the impact on many retailers, Canadian manufacturers are being challenged by the strong Canadian dollar.

"Overall there tends to be negative impact on our manufacturing sector and of course, our overall trade position as we're seeing with our current account deficit running more than 3 per cent of GDP, so that represents a drag on our economic performance."

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The dollar has particularly gained ground over the past week as financial market traders increasingly reckoned that the U.S. Federal Reserve is going to step up with another jolt of economic stimulus to keep a fragile recovery on track.

The precarious state of the U.S. economy was thrown into relief last Friday when already modest job creation expectations were dashed, with the economy creating just 97,000 jobs. On top of that, job creation figures for June and July were revised downward.

It is widely expected the Fed will announce further stimulus Thursday at the end of its two-day meeting on interest rates.

"It could take the form of just a modest endeavour to push out its rate guidance and lower long term rates or perhaps a more aggressive measure of renewing its asset purchase program," said Mr. Guatieri.

In other words, the Fed could embark on yet another round of quantitative easing, which sees the central bank print more money to buy up more bonds, which in turn has a weakening effect on the greenback.

"What that means is that U.S. longer-term interest rates are likely to fall faster than Canadian rates," he said.

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"The positive rate spread in favour of the Canadian dollar, both the short and long gains will persist for quite some time and that's drawing a lot of capital into Canadian debt markets and pumping up our currency."

The dollar was also supported by the hawkish stance by the Bank of Canada. The central bank left its key rate unchanged at one per cent last week and maintained language indicating that rates will likely rise at some point in the future.

"I think that it reinforces the message in global investor minds that interest rates are likely to remain relatively higher here in Canada than in many other advanced countries, where they're likely to go up sooner in Canada than elsewhere and therefore Canadian debt instruments look very attractive," said Mr. Guatieri.

Hopes for further stimulus measures from central banks pushed copper prices to a 17-week high. The December contract in New York was ahead 4 cents to $3.69 a pound, adding to a 13 cent jump on Friday.

Oil prices rose for a fourth session with the October crude contract on the New York mercantile Exchange ahead 12 cents to $96.54 a barrel.

Bullion pulled back $8.70 to $1,731.80 an ounce.

Meanwhile, data released Monday showed that China's economic slump is worsening.

Imports declined 2.6 per cent from a year earlier during August, below analysts' expectations of growth in low single digits. That came on top of August's decline in factory output to a three-year low and other signs growth is still decelerating despite repeated stimulus efforts.

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