Canadian Dollar Pushes Towards Parity With US Dollar

Posted October 18, 2009

The Canadian dollar continued to strengthen against the US dollar on Friday and is approaching parity. The UK pound rose against the euro and the US dollar as the UK economy strengthens. The Australian dollar has strengthened 50 percent over the last 12 months against the US dollar. The yen continues to weaken though turnaround is expected soon.

 

The Canadian dollar continued its progress on Friday towards parity with the US dollar when it strengthened to $1.0370. This is creating some anxiety in Canada according to an article in the New York Times over the weekend coming out of Ottawa, Canada.  When discussing the impact of a stronger dollar on a Canadian business the article states, “...every cent the Canadian dollar gains shaves 4 million Canadian dollars from its operating earnings.” (NYT, 15-October-2009, p. B7)

Over 40 percent of the Canadian economy relies on its business relationship with the US.  The Canadian dollar has risen by 27 percent against the US dollar since March 2009 and it is continuing to strengthen. Some of the currency strength is coming from the rise in relevant commodity prices such as oil and gold.

The Canadian economy is on the recovery track with employment rising higher than anticipated during September.  One Canadian dollar will purchase 96.44 US cents.

Volatility projections show a 60 percent probability the Canadian dollar will reach US dollar parity by the end of the year. Though the rise in the Canadian dollar was expected, it is the rate of the change that has taken many economists and businesses by surprise.

The UK pound strengthened on Friday to $1.6361 against the US dollar and by Monday was at $1.63653. The pound also rose against the euro to 1.1015 pence per euro. The rise in the pound is due to stronger signs the UK economy is well enough into recovery to suspend the bond purchases begun as a component of the quantitative easing program.  Retail sales and GDP numbers for September are due to be released this week and they are expected to show an increase.

The Australian dollar could very well hit parity against the US dollar by the end of the first quarter of 2010 according to some economists. The Aussie is currently at 91.19 US cents after touching a 14 month high of 92.70 last Friday.  The Australian dollar has risen over 50 percent in the last 12 months.

Australia had lowered its interest rates to 3 percent during the recession but became the first country to increase the rate as a recovery takes shape. Governor Stevens defended the interest rate increase to 3.25 percent by saying it is an appropriate response to an improving economy just as lowering the rate was the right response to a weakening economic picture. This and other comments make it clear he wants normalized monetary policy instituted as soon as possible.

The Japanese yen remained low when paired with the US dollar over the weekend.  It also remained weak against the euro.  But these lows may not last as the US economy continues to struggle to recover from the recession. Japanese investors have been repatriating funds recently but are expected to return to higher yielding foreign assets.  This could lead to a correction.

The yen weakened to 91.09 against the US dollar and to 135.62 yen per euro.

This week there will be more earnings reports issued by large US companies for the third quarter of 2009.  In addition, China is expected to release economic activity reports which are sure to trigger currency market activity.

 

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