Rising dollar didn’t sting
The Canadian dollar’s strong rally in the first week of the year is luckily coming at a time of stronger commodity prices.
Since late December, the dollar has gained about two cents relative to its American counterpart. At the beginning of the week, it was flirting with 66.5 cents (U.S.)
When the Canadian dollar rises, it usually means grain and livestock prices head in the other direction.
That’s because most commodities are traded in American currency, so when our dollar falls, the price quoted in Canadian currency rises, and when it rises the price falls.
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But hog and canola prices did not tumble last week because the fundamentals were strong enough to cancel out the effect of a stronger loonie.
The value of the Canadian dollar is strongly linked to commodity prices, especially in the metals and energy sectors.
World currency traders still see Canada as a drawer of water and hewer of wood. They aren’t totally wrong. Primary industries such as mining, oil and gas and agriculture still make up a big part of the Canadian economy.
So when commodity prices nosedived last year in the wake of the Asian financial plunge, the loonie went with them.
Now, with Asia’s economies starting to show life again and the U.S. economy chugging along, commodities are rebounding and so is the loonie.
New currency
Another factor was the launch Jan. 4 of the euro, the European Union’s new single currency serving 11 countries.
That prompted two developments.
It provided a strong alternative to the American dollar. Currency traders clung to the security of the U.S. buck last year when there was so much turmoil in Asian, Russian and Brazilian currencies. Now that there is an alternative, some of the money parked in U.S. dollars switched to the euro and the value of the dollar dropped.
Also, with fewer European currencies, investors who wanted to diversify their portfolios began to consider the Canadian dollar as a place to put some equity.
But analysts doubt it is in for a long term run up in value.
The loonie has had trouble breaking past the 66.66 cent mark. If commodity prices fail to hold onto their gains, the dollar could fall back to the trading range it had in late 1998, analysts say.
