Over the past couple of months we’ve seen how the Loonie trampled over almost every other major currency in sight, most especially the US dollar. After hitting a high of 1.0781 earlier this year, the USDCAD dropped day after day after day after day… Oops, where was I?
As a currency trader, you’re probably asking yourself where the Canadian dollar’s strength came from. Because of this, I decided to come up with my very own list on why I think the Loonie was able to reach parity against the US dollar.
Here are 5 reasons why the Loonie rocks:
1. Rising employment
Canada is set to report another increase in hiring for the month of March as they release their employment change data tomorrow. After adding 20,900 jobs in February, a total of 25,300 in net hiring in March could allow the Canadian unemployment rate to stay unchanged at 8.2%.
As a very important lagging indicator, this improvement in Canada’s labor market could hint at further advancements in consumer spending and overall economic activity. After all, people are more likely to spend if they aren’t worried about holding on to their jobs, right?
2. Rising oil prices
Being one of the world’s largest producers of “black crack,” the Canadian economy is largely affected by the trend in oil prices. Higher demand for oil in the world market, which usually leads to a rise in oil prices, translates to more moolah flowing back to the black crack dealer.
Thanks to the recent bursts of risk appetite, crude oil prices have picked up and climbed above $80.00 per barrel last week. Since then, oil prices continued to rise, hitting a new 18-month high at $86.84 per barrel and allowing the Loonie to strengthen.
3. Rising inflation
Recent reports have shown that raw materials and consumer prices have been steadily rising. The latest CPI revealed that consumer prices rose by 0.7% from January to February. Remember, the prices of hockey sticks and pucks rise as a result of increasing demand. This uptick in inflation would indicate that consumer activity is picking up, which of course bodes well for the economy. It seems to me that the quantitative easing measures are starting to show their effects on the Canadian economy…
4. Rising interest rates… Kidding! Soon, maybe.
With inflation rising, how will the Bank of Canada (BOC) react? Some traders speculate that with inflation picking up, the BOC may actually cut back on its quantitative easing measures, one of which would be to raise interest rates. Hiking rates from their current levels at 0.50% would curb economic activity, which in turn would try to cap inflation.
This bodes well for the Loonie, as higher interest rates would make Canadian investments more attractive.
5. Change in the BOC’s rhetoric
Since October of 2009, the BOC had been vocal about the risks of having a strong Canadian dollar. The Loonie’s persistent strength was seen as detrimental to Canada’s economy since it negatively affects the country’s exports industry. You see, Canada is the biggest trading partner of the US, which imports almost everything from its friendly neighbor upstairs. Having a strong Loonie weakens the US’s buying capacity for Canadian products such as wheat, automobile components, and oil. And with a lower purchasing power, demand for Canadian products gets dampened.
During the BOC’s last three interest rate decisions, the bank noted that a strong Loonie plus the low level of US demand would curb Canada’s economic recovery. Recent reports, however, show that the bank has softened its tone regarding the currency. While fundamentally a strong currency still caps the orders for Canadian exports, having one also makes it more affordable for Canada to import products from the US. This would allow them to transfer more value to their consumers and in turn stimulate domestic demand.
So there you have it folks… These are the five reasons why I think the Loonie has been the preferred currency of traders. Taking each of them individually probably isn’t much but if you put them all together, then a pretty strong case is built to buy up the Loonie.