OTTAWA - Is the Canadian loonie preparing to take flight again?
While betting on the up and down movements of a currency is risky, some economists are beginning to move off their bearish outlook for the Canadian dollar and contemplating that the loonie may be readying a move to higher ground, well above parity.
"One could make the case that the loonie is undervalued at today's oil prices," says Bank of Montreal deputy chief economist Douglas Porter. "Partly, this likely reflects the fact that the foreign exchange market, for one, simply doesn't believe today's oil prices will last.
"Another factor may have also been that the Bank of Canada may cut (interest rates) further, but the U.S. Federal Reserve looks done," he added.
For several years, the Canadian dollar has generally moved in tandem with prices of commodities Canada has in abundance, particularly oil.
But the Canadian dollar hasn't gathered much strength during the surge from US$95 oil at the end of 2007, Porter noted. It only moved past parity with the U.S. currency when oil cracked the US$130 level this week.
A good sign for the loonie's prospects was Scotiabank's commodities report Thursday that forecast crude oil prices in the US$135-US$140 range for the rest of the decade, based on a paucity of new non-OPEC production and rising demand from emerging economies in Asia.
Scotiabank currency analyst Stephen Malyon said the bank is forecasting the loonie to finish the year at $1.01 US and 2009 at $1.06 US, but said it will likely revise the forecast upwards next week on the growing perception that high oil and high commodity prices are here to stay.
"I think the Canadian dollar has a lot of things going for it, from a structurally sound economy, and the fact we're a commodity exporter amid a cyclical bull market in commodities," he said.
Of course, there are other factors that have come into play in the relative pricing of the loonie.
The Canadian dollar is directly impacted by the interest rate spread between Canada and United States and was lifted last fall when the Fed moved aggressively to cut rates in expectation of a serious economic slowdown.
As important is recent language coming from both central banks which suggests the Fed is heading for the sidelines, while the Canadian bank remains on an easing trend.
There is also relative purchasing power of both currencies, which suggests that the loonie remains the weaker sister of the greenback. Some studies pit the loonie's purchasing power at between 80 cents and 85 cents U.S.
CIBC senior economist Avery Shenfeld says the Canadian dollar's failure to track more closely the commodity price inflation could be due to the teeter-totter nature of the Canadian economy.
As rising commodity prices lift the dollar, the loonie's high value pushes down manufacturing output and exports.
"I think the dollar is reasonably valued judged by where Canada's current account balance is," he said. "We have an expanding trade in energy, but a growing deficit in automotive products and other manufactured goods. They are offsetting."
One factor that could give a lift to the dollar, Shenfeld added, is if the high commodity prices attract another round of foreign acquisitions of Canada companies, which increases market demand for the loonie.
But, overall, the sentiment around the loonie appears to be shifting to a buying position once again.
As U.S.-based analyst Dennis Gartman reminded his clients in his newsletter Friday, he was bullish on the loonie years ago when the world thought the currency was for the birds, bearish when it shot to record levels last fall, and now is urging them to get back on the bandwagon.
"We are back on the bullish track in favour of the Canadian dollar, and as noted above, we are now even considering buying it whilst selling the Yen," he wrote. "Were this not a holiday (Memorial Day weekend), we'd be doing exactly that. Since it is a holiday weekend, we'll wait until everyone returns Tuesday."
