You’d be mad to ignore the loonie

Kathleen Brooks
IT’S tough being Canada. Whatever you do, you are always going to be compared to the superpower next door. And even when you go and host a major sporting event, people only snipe.

But you would be wrong to underestimate the land of lumberjacks and Labatt’s. For the past few months, the Canadian dollar has been stuck in a stubborn range against the greenback, but there are signs that the loonie – as the Canadian dollar is known – is starting to reassert itself.

For a start, 43,000 jobs were created in January in Canada. Trade, both exports and imports, has risen by 10 per cent, and weak retail sales in the autumn were partly reversed at the end of last year.

This should bode well for GDP data for the fourth quarter of 2009, which will be released next week along with an announcement from the Bank of Canada on interest rates. If the central bank signals that it might have to hike interest rates sooner than expected due to an economic upswing, then that will be good news for the loonie.

Camilla Sutton, currency strategist for Toronto-based Scotia Bank, thinks that the Bank will hike rates by 100 basis points by the end of the year, significantly higher than the 66 basis points of tightening that the market currently expects.

Because currencies are deeply sensitive to movements in interest rates, this heralds big moves for the Canadian dollar. Sutton forecasts that the loonie will reach parity against the US dollar by mid-year (you currently need 1.04 Canadian dollars to buy a single American one).

Added to this is the fact that Canada’s economic profile has risen since the outbreak of the financial crisis. Its conservative banking system avoided the subprime meltdown and its well-diversified economy – a mix of exports and domestic consumption – could serve as a good model for a UK that is trying to re-balance its economy away from financial services.

A strong commodities flavour to the economy also means that the loonie can leverage off global growth. Canada is the sixth largest oil producer in the world, and any upward pressure on commodity prices should be reflected in the Canadian dollar. Go long the loonie.