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with Gerald Klassen

The Canadian dollar has been under pressure over the past couple of weeks leading up to our deadline for this issue. Strength in the U. S. greenback was the main reason for the softer Canadian dollar. There are many factors that influence the Canadian dollar on the world market. Sometimes the loonie moves in line with the U. S. currency and other times there is an inverse correlation. When factors come forward that influence the U. S. dollar individually such as U. S. economic data, the U. S. index usually moves against all other major currencies. During the height of the world recession and credit crisis, the U. S. dollar was viewed as a safe haven, which resulted in its strength against other currencies. However, when economic influences come forward that strictly influence the euro or Yen, the Canadian and U. S. currencies move in tandem. Economic events that are more favourable for North America have a similar effect. It is important to note that there are also interest-rate relationships that influence world currency values and these are determined by monetary policy of the central banks.

So let’s look as some of those factors. Last spring the U. S. Fed rate was set a 0.0 to 0.25 per cent, a historical low, while the U. S. Treasury eased monetary policy by printing money to buy long-term bonds. That drove up bond prices and lowered yields. Long-term mortgage rates are based on these long-term yields so this strategy helped stimulate the housing sector and business expansion.

Lowering yields for U. S. dollar related assets also helped relieve the credit crisis as there was little incentive to hold U. S. currency. This monetary easing policy is now coming to an end.

There has also been a splurge of economic data recently suggesting the U. S. economy is moving into an expansion phase. January unemployment was running at 9.7 per cent, down from the 10 per cent highs of last fall. And while equity markets came off the January highs last month, the Dow Jones remained around the 10,000 mark.

Inflationary pressures are becoming more of a concern. The U. S. is likely counting on inflation to help pay back their large deficit but it needs to keep it under control. Rising consumer confidence and stronger retail sales suggest inflation has the potential to be a larger problem. It now looks like the U. S. Federal reserve will increase interest rates later this spring. This will make the U. S. dollar a higher yielding currency. Bond prices are decreasing and yields are increasing for both short-and long-term debt instruments.

Canadian short-term interest rates are near 0.25 per cent, however, the Bank of Canada has not had to implement a full monetary easing policy as our economy has fared much better than the U. S. through the recession, largely due to the stable banking sector. If U. S. interest rates and bond yield move to a premium over Canadian interest rates, then the U. S. dollar should be trading at a premium to Canadian dollar. This is the main factor that will keep the loonie at a discount to the greenback.

A Dow Jones Industrial average above 10,000 requires interest rates to be in the range of four to six per cent, which is a long-term healthy level to stabilize prices and ensure steady economic expansion. This is likely the one-to two-year goal of the U. S. Federal Reserve. The Canadian U. S. exchange rate will be determined on how the Bank of Canada responds. Ontario was the hardest hit during the recession and unemployment was running at 9.7 per cent there in January compared to 8.3 per cent nationwide. As the Ontario economy improves, the Bank of Canada will be inclined to increase rates in line with the U. S. Banks are already starting to raise rates on mortgages and credit lines in anticipation. Keep in mind Canadian monetary and fiscal policy favors a Canadian dollar at a discount to the U. S., which is our largest trading partner.

I feel the upper strength limitation has been established for the Canadian dollar. Short-term support is in the range of 90 to 92 cents. There is potential for the loonie to trade down to these levels over the next four to six months. Factors that drove the Canadian dollar higher against the U. S. greenback are now starting to reverse. Speculative interest is also leaving the Canadian dollar now that energy and metal values have come of their highs. Longer term, this will have a more favorable influence on the Canadian cattle market to enhance cattle trade with the U. S. and overall beef exports into Southeast Asia.

Gerald Klassen analyzes markets in Winnipeg and also maintains

an interest in the family feedlot in Southern Alberta. He can be

reached at [email protected]or 204-287-8268.

The material contained herein is for information purposes only and is not to be construed as an offer for the sale or purchase of securities, options and/or futures or futures options contracts. While the information in this publication cannot be guaranteed, it was obtained from sources believed to be reliable. The risk of loss in futures trading can be substantial. The article is an opinion only and may not be accurate about market direction in the future. Do not use this information to make buying or selling decision. This outlook may be wrong and could cause adverse financial consequences if decisions are based on this information.

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