The Canadian dollar is likely to prove resilient in the coming months as stable global growth and a favourable interest-rate spread with the United States offset global credit market turbulence. The credit crisis earlier this month pulled the Canadian dollar far from the 30-year high it reached versus the greenback last month.
But it has since been one of the best performing currencies, reclaiming a chunk of its losses as market players price in a US Federal Reserve rate cut, while the Bank of Canada is expected to leave interest rates unchanged.
The Bank of Canada's overnight rate, hiked last month for the first time in more than a year, is 4.50 percent, while the fed funds rate has been steady at 5.25 percent for more than a year.
"Even if the Fed cuts rates in September I highly doubt the Bank of Canada will, so the interest rate spread will narrow in e Canadian dollar," said Sal Guatieri, senior economist at BMO Capital Markets. "And as long as the global economy is withstanding the current credit rout, I think commodity prices will remain elevated and support the Canadian dollar."
Guatieri said a return to panic mode in markets could send investors fleeing back to US treasuries and the US dollar. But barring that, he expects a return to normalcy to help the Canadian currency reach 97 US cents by the end of 2007.
The Canadian dollar, which fell to C$1.0865, or 92.04 US cents, last week, was at C$1.0553, or 94.76 US cents, at 1:30 pm (1730 GMT) on Thursday. It reached a multi-decade high of C$1.0340, or 96.71 US cents on July 25.
A key factor behind the US dollar's strength against the Canadian currency at times of risk is that the Canadian dollar is a "pro-cyclical" currency - rising when the economy surges, and easing when the economy turns down. When uncertainty over the US economy - where the bulk of Canada's exports go - or the global economic outlook increases, the Canadian dollar tends to drop as a flight to quality boosts the US dollar.
Even though recent concerns over the US subprime mortgage crisis have spooked investors, they have done little to shake the global economic outlook. "We had risk increase dramatically and that caused carry trade unwinds, but despite all this financial market turmoil the global economic outlook really didn't get affected," said David Watt, senior currency strategist at RBC Capital Markets. "This time (the Canadian dollar) has certainly been a standout in the fact that we haven't really been all that measurably hit."