Parity at Last?

Much like the other major currencies, the Canadian dollar got swept away by the strong US dollar buying that we saw at the beginning of the year. The USDCAD went on a tear, with the price hitting as high as 1.0781.

However, the recent run of good data and strong crude oil trading have given the CAD supporters the boost needed to buckle these losses. The pair has since dropped by about 700 pips, hitting a low of 1.0071 yesterday, marking the 14th time in the last 16 trading days that the Loonie has gained.

Uh oh, the Loonie’s strong rise makes Canadian exports more expensive, which means that demand for their products could falter! While an appreciation of the Loonie used to make BOC officials squirm in their seats in the past, yesterday’s remarks from the Canadian Industry Minister himself assured that the export-dependent economy need not worry this time.

Echoing comments from Canadian Finance Minister Jim Flaherty, Industry Minister Tony Clement remarked that the country’s exporters are learning to deal with the rising value of the Loonie. According to him, manufacturing firms are enjoying the benefits of lower taxes, higher productivity, and government efforts to reduce trade dependence with the US. Looks like there’s no need for the BOC to talk down the Loonie now, making that one less obstacle on the path towards parity!

The upcoming Canadian retail sales report could also provide an extra push for the USDCAD as it approaches the 1.0000 handle. Recent data suggests that the retail sales figure could lead to a hat trick that will trigger a Winter Olympics style parity… oops, I meant party!

For one, Canada’s employment change report for February, which measures the net number of people that were able to get jobs, beat consensus and printed 20,900. After topping out at 8.7% last September, joblessness in the country has steadily decreased to 8.2%.

More importantly, the wholesale sales report hints that consumer activity is starting to pick up. The report showed a 3.0% climb in January, five times the increase initially expected. On top of that, the previous month’s 0.7% rise was revised up to 0.9%. Remember, retailers typically order more from their suppliers when they think sales will start coming in.

Besides, the Loonie’s run towards dollar-parity was not just helped by Canada’s upbeat economic data. Mixed developments from the US have also made the Loonie’s pursuit a lot easier.

Just yesterday, the US Federal Reserve kept its interest rate unchanged again at 0.25% while renewing its promise to hold its rate at this level for an “extended period,” dashing investors’ hope of a sooner Fed rate hike. In contrast, the BOC was more upbeat and said that inflation and economic output was better than they expected, giving currency traders reason to believe that the BOC could raise rates earlier.

Employment in Canada has also fared better than in the US. The US, while seeing its unemployment rate improve to 9.7% still lost about 36,000 more jobs in February. Canada on the other hand, added about 20,900 more during the same period on top of the 43,000 hired in January.

Yesterday, the US also saw its PPI drop to -0.6% in February. Its headline CPI, which is expected to print 0.1% during the same period, could come in lower given the worse-than-expected drop in producer prices since any increase in input prices is usually transferred to consumers. The USD could experience another flat tire if the US’s CPI figures come in below consensus.

With all these positive developments in Canada’s economy, the BOC could eventually call for a rate hike. Once this happens, the CAD would likely hit on its NOS and make a beeline for the 1.0000 mark!

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