No more jokes about the loonie

published 11 October 2007

Canadians have endured "years of American jokes" about Canadian "Monopoly money", as Steven Chase notes in Canada's Globe and Mail. But the Canadian dollar, or loonie, is fighting back: it is now at a 30-year high of around 97 US cents. Parity "here we come", says Dennis Gartman of the Gartman Newsletter.

The loonie has been buoyed by soaring prices for commodities, which account for more than half of Canada's exports. These have created a current account surplus and helped the government balance the budget. Everything Canada produces "is in piping hot demand", says Douglas Porter of BMO Nesbitt Burns. And while US rates are heading down, Canadian ones are likely to stay on hold given recent solid data.

It's no surprise, then, that foreign investors are becoming increasingly interested in the loonie and that the performances of the US and Canadian dollars have been diverging since May. "We're seeing a clear decoupling between the strength in Canada", fuelled by the emerging world's demand for commodities, and the "lacklustre economic situation in the US", according to Boris Schlossberg of Forex Capital markets. He reckons the US and Canadian dollars should be worth the same by the end of the year. Canada's economy remains relatively highly exposed to the US, so a sharp slowdown there may take the shine off the loonie in the short term. But given that Canada has "got all those things the world needs", longer-term, the loonie looks likely to be stronger than the US dollar, says John Taylor of FX Concepts.