Invest in Canada

‘Goldilocks’ dollar is happy here

by investor on 25/02/09 at 2:06 pm

We have reached the Goldilocks level for the Canadian dollar. After a dramatic, commodity-driven boom and bust, the loonie has settled into a comfortable trading range in recent months. The currency is trading slightly below estimates of fair value and that is likely where it will trade over the near term.

The commodity boom is over, for now at least, and the Canadian dollar is having a serious hangover. Commodity price appreciation led to gains “by leaps and bounds” to the trade balance according to Peter Hall, chief economist at Export Development Canada. That rise translates to roughly 8% to 9% currency appreciation annually from 2003 to the beginning of 2008, says Hall. “Since then we have seen a big downdraft that is mostly commodity price driven.”

The currency also got a real boost when foreign multinationals had a ‘pay any price’ mentality for owning Canadian resource assets.

Now that Canadian assets are better valued, many multinationals, with the exception of the oil majors, are trying to shake the debt monkey off their backs. Energy giants were more conservative during the run-up in commodity prices and are sitting on sizeable cash balances. So they may pick at the low-hanging fruit — as did Total SA of France with an unsolicited $617-million bid for oil sand operator UTS Energy. However, the multi-billion dollar deals of yesteryear have dried up.

In its most recent Monthly FX Outlook CIBC has “pushed back” part of its expectations for a rise in the price of oil into 2010, with negative implications for its year-end Canadian dollar target.

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