Canadian Dollar rises for a third day as stock markets jump and greenback tumbles

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By B.H. Mckenna, The Canadian Press

TORONTO - The meteoric rise of the Canadian dollar this week may turn out to be a flash-in-the-pan rally, but at least one leading economist thinks it may have staying power.

Aron Gampel, deputy chief economist at Scotiabank, said Wednesday that it's necessary to look behind the headlines into factors that will influence the strength of the Canadian currency in the coming months and even years.

And against that backdrop, Gampel says even the prospect of a return to parity between the Canadian loonie and the American greenback is "not farfetched."

"I would not say that parity is out of the question. In fact I would say its probably closer to reality," he said in an interview with The Canadian Press.

While cautioning that parity is something "down the road as opposed to tomorrow," Gampel sees many economic signs that the loonie will gain against its U.S. counterpart.

It certainly looked that way Wednesday, as the loonie continued its three-day tear. It closed regular trading at 89.74 cents US, its highest close since June 11, after gaining 1.71 cent on Wednesday and 2.17 cents US over the prior two days.

The American dollar also fell against the Japanese yen, euro and British pound.

Many experts attribute the recent strength of the U.S. dollar, until recently, to its traditional role as a safe-haven currency in troubled economic times.

Steve Butler, director of foreign exchange trading at Scotia Capital, noted that the U.S. dollar has weakened as confidence in the economy strengthened.

"People are feeling a lot better over the last couple of days as earnings season kicks off in the U.S. and Canada has been a benefactor, " he said.

And while the loonie is considered a commodity-based currency, Butler said: "I don't know if I would pin (the loonie's rise) on commodities or any one particular area."

Butler said he figures the rally may have a little way to go yet, but "I do think we may be coming toward the end of the line here, suggesting that if the market begins to tank investors will be back buying U.S. dollars."

"It's a very fickle market at the moment," he said.

Still, with fears of global economic implosion fading and the markets stabilizing, Gampel says fundamentals have begun to reassert themselves, setting the stage for a transition from recession to recovery.

"In that vein, we've had commodity prices obviously leading the way and the Canadian dollar and the Australian dollar and others that are commodity sensitive have been big beneficiaries of this renewed optimism," Gampel said.

The Scotiabank economist even sees a silver lining in Wednesday's otherwise dismal manufacturing report from Statistics Canada showing manufacturing sales fell six per cent to $38.4 billion in May, the lowest level in more than a decade.

"One would think that numbers suggesting the economy is still going through some very rough times in manufacturing would be negative for the currency, yet the currency is going up, he said."

Gampel attributes that to the fact that the manufacturing data is "lagged so much," adding that the June figures, while still expected to be bad, are likely to be an improvement over May.

But July, he says, will likely show a substantial rebound because the automakers, a major drag in the May numbers - and Chrysler and General Motors in particular - are beginning to ramp up production again to get cars that are in demand onto dealer lots.

That, together with other positive data, including recent major improvements in the housing market, show the economy is beginning to rebound.

"So, all of a sudden current antecdotal evidence suggests that in some sectors, and in some regions, a turnaround is at hand," he said.

"I think the markets are looking ahead and I think they are now building in expectations that we're going to have improved growth and the Canadian currency continues to benefit from that."

Gampel also said another issue that "gets lost in the flood of data" is that the U.S. announced this week its fiscal year deficit was already breaching the $1-trillion mark and on its way to $2 trillion.

Amid fears that a second stimulus package will be needed to get the U.S. out of its deep economic funk and the balance sheet already bloated by recession and new spending, "the fiscal mismatch may be so extreme that it will continue to put concerns into investors about the strength of the U.S. dollar over the longer term."

"As investors diversify increasingly over time away from U.S. investments . . . Canada will likely benefit," partly as a reflection of fundamentals "that on a relative basis are better than in the United States."

Meanwhile, a persistently strong Canadian dollar could benefit consumers and businesses that import while exporters will have to adjust to what may be a higher dollar over the longer term.

"Tourism is obviously a sector that will have to restructure in order to deal with competitive issues from a currency standpoint as well as other issues," Gampel said.

"And of course manufactures (and other exporters) who will revive on the back of the global turnaround are still going to be obviously impacted by competitive issues, the currency being one," he said.

Last Edited by BLAAAAAAAAAAAAAAAAAAH on 07/15/2009 09:45 PM