Loonie wings higher, again
JOHN PARTRIDGE
Globe and Mail Update
October 23, 2007 at 4:29 PM EDT
The loonie resumed its ambitious stratospheric flight-plan Tuesday, after a sharp fall Monday, briefly touching another multi-decade high.
The currency had a variety of winds under its wings. These included the release of slightly stronger than expected retail sales numbers for August, a recovery in European and U.S. equity markets and in gold, oil and copper prices, as well as a weakening of the U.S. greenback against the loonie and other major currencies.
“We’re back to the story as usual for the [U.S.] dollar, which is a resumption of its downtrend,” said David Powell, a New York-based currency analyst for Ideaglobal, a British investment research firm, noting that investors had reversed their journey of Monday, when they fled equity markets for the relative “safe haven” of the greenback.
There also were rumblings that British mining giant Rio Tinto Plc has been buying up some of the Canadian dollars it needs to pay for its $38.1-billion takeover of aluminum giant Alcan Inc. of Montreal, whose shareholders have until 6 p.m. EDT Tuesday to tender their stock.
“There’s a lot of chatter, given that the Alcan deal is coming to its acceptance date, that there may be some M&A flows moving through the market,” said George Davis, chief foreign exchange technical analyst at RBC Dominion Securities in Toronto.
Having officially closed Monday at $1.02 (U.S.), down more than 1.55 cents, its steepest one-day plunge in two years, the loonie climbed overnight and hit a new 33-year high of $1.0362 at about 8.05 a.m. EDT. That was 0.0017 cents higher than last Friday when it closed at $1.0345, the highest level since June of 1974.
It subsequently slipped back a little, and closed the session at $1.0351, up $1.51 cents from Monday’s finish.
Some of the lift came from Statistics Canada, which said retail sales grew 0.7 per cent in August, rather than 0.5 per cent as Bay Street economists had forecast.
This provided some relief because it suggests that spillover from the credit market crunch has not yet spilled over into consumer spending, Mr. Powell said. “On the other hand,” he cautioned, “it’s only for the month of August, and those effects will likely take several months to be seen.”
But most of the power came from an overnight recovery in gold, oil and copper prices, along with stock market gains that continued in Asia and Europe and this morning in North America, although by midday, Canada’s benchmark S&P/TSX composite had slipped into the red.
“The whole currency market seems to have swung right back around,” Steven Butler, director of foreign-exchange trading at Scotia Capital Inc. said early Tuesday. “It was all doom and gloom yesterday morning when we walked in, and things are feeling a whole lot better today.”
The whipsawing shows how fickle the currency markets are at present, Mr. Butler added. “People are looking at so many things for direction,” he said. “We got a very necessary and very healthy correction yesterday, and now the market is back in feel-good mode again.”
Several other major commodity-linked currencies were also up against the greenback, including the Norwegian kroner, up 1.1 per cent from Monday’s close, and the Australian dollar, up 0.9 per cent.
“These moves match the recoveries seen overnight in oil, gold and copper,” Greg Anderson, Chicago-based director of foreign exchange strategy for the Netherlands’ ABN Amro bank, said in a commentary, adding that the euro, too, is benefiting.
“With higher commodity prices and rising equities, the global circuit of money flow will in short order lead to central banks and [sovereign wealth funds] buying EUR-USD, which the market has properly anticipated by pushing EUR-USD 0.5% higher since yesterday’s close.”
Currency specialists attributed Monday’s plunge to the global retreat from equities to the relatively safe haven of the U.S. dollar, which rose against most major currencies, a dip in oil, gold and other commodity prices. They also cited, to a lesser extent, comments Sunday by Bank of Canada governor David Dodge that the loonie’s latest spurt upwards stemmed from speculation, not economic fundamentals.
Major Asian equity indexes rose Tuesday, with Japan’s Nikkei 225 closing up 0.07 per cent gain, and Hong Kong’s Hang Seng up 3.54 per cent. Europe followed suit, with, for example, Britain’s FTSE closing up 0.51 per cent, and Germany’s DAX up 0.61 per cent.
In a commentary for clients Tuesday morning BMO Nesbitt Burns economist Sal Guatieri said Mr. Dodge’s comments in Washington “underscore the downside risk that the currency poses for the economy, which, if borne out by the data, could spur [an interest] rate cut early next year.”
The strong loonie makes it tougher for Canadian exporters to sell their products abroad and can act as the same sort of brake on the economy as an interest rate hike.
U.S. investment newsletter writer Dennis Gartman told readers Tuesday he thinks it is unlikely that the Bank of Canada would follow up on Mr. Dodge’s comments and intervene in the market to try to take some of the steam out of the currency. “The Bank has show little interest in such activity, and has preferred to leave the forex market to itself to sort this thing out,” he said.
Meanwhile, currency strategists at France’s BNP Paribas warned Tuesday that the Canadian dollar could be smacked down when Alberta Premier Ed Stelmach finally reveals how he plans to handle controversial recent recommendations to hike royalties and other levies on the province’s vital oil and gas industry.
“A capital-market-toxic announcement could trigger a sharp CAD sell-off,” the French bank said in a note to clients.
http://www.reportonbusiness.com/servlet/story/RTGAM.20071023.wcdollar1023/BNStory/Business/home
