Is the Party Over?
Thursday, November 29th, 2007
By Inya Ivkovic, MA for Profit Confidential
So, the loonie has had a wild ride in the past few weeks. First it hit parity, and it was great, like some great vindication of a currency with a weird nickname. Then the Canadian dollar soared past the $1.10 mark. Of course, it was reason sufficient enough to set off an avalanche of pro and con lists of having a strong currency. Then the loonie went back to parity, deflating the effects of both lists, mostly as a result of declining commodity prices.
Basically, for the month of November, our dollar lost more than five percent of its value, which represents a drop not seen for the past three decades, albeit the parity value is also not something Canadians have seen in the past three decades. Complicated, isn’t it?
According to Douglas Porter, deputy chief economist at BMO Nesbitt Burns, in his analyst note quoted in Wednesday’s “Globe and Mail,” “Admittedly, this plunge follows hard on the heels of the two best months for the currency on record, highlighting the extreme volatility of currency markets in recent months.”
Currency experts attribute this rollercoaster ride to a number of factors, such as declining commodity prices, which have been Canada’s economic driving force so far, as well as expectations of decreased interest rates in the near term. Analysts on the interest- rate watch agree with a 60% certainty that the Bank of Canada may cut interest rates as early as Tuesday next week. There is also a general consensus that, if nothing happens next week; more rate cuts are likely to come in to play in the first quarter of 2008.
According to Mark Chandler, fixed income strategist at RBC Capital Markets, “An increasingly large drag from the trade sector and moderating inflation pressures are likely to see the bank shift into rate-cutting mode, though the current strength in the domestic economy may delay a cut until early 2008.” More precisely, Chandler expects one interest-rate cut in January and another in March, bringing Canada’s key lending rate back down to four percent.
In any event, there is not an analyst on the Street who does not expect more volatility in the financial markets as North American economies shift to the new equilibrium. If we care to refer to this process as the “party,” then the answer to the question from this article’s title is no, the “party” is not over — far from it!
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