Business World

Tough talk from the Bank of Canada briefly pulled the rug from under Canada’s rebounding currency this week, but strong commodity prices and a weak U.S. dollar mean the rant likely won’t have a lasting impact.

Last week, the Canadian dollar nearly climbed above the U.S. dollar for the first time since July 2008, something the central bank fears would endanger the economic recovery, given Canada’s reliance on exports to the United States.

Clearly anxious to contain the currency’s surge off a four-year low hit in March, the Bank of Canada on Tuesday renewed its commitment to keeping interest rates low and forecast delays in the economic turnaround.

The statement extinguished any talk that the Bank of Canada would follow Australia’s central bank in hiking interest rates quickly, and Canada’s currency fell 3.6 percent from the 14-month high it hit last week.

But the currency nudged its way higher on Wednesday, and seems set to resume its march toward parity with the greenback once the sting of the central bank statement wears off.

“This is a short-term trend reversal but it’s really not a game changer,” said Jack Spitz, managing director of foreign exchange at National Bank Financial in Toronto.

“The reaction to the statement, not surprisingly, was to bid dollar/Canada higher, but the sustainability is going to be based on ongoing fundamentals which continue to advocate for a stronger Canadian dollar over time.”

Spitz said this week’s pullback in the Canadian dollar was driven mainly by speculative accounts, which he described as sensitive to short-term volatility driven by news like the Bank of Canada statement payday loans with low fees.

The Canadian dollar has risen 17.5 percent this year, helped by lofty prices for oil and gold, economic data that hinted at a rebound, and surging equity markets.

When those factors reclaim the spotlight, many experts say the currency could climb again as investors sell the greenback and buy assets that are more closely correlated with economic recovery.

“Can we trade down to parity? Yes, we absolutely can. Are we going to stay there? I don’t think so,” said Steve Butler, director of foreign exchange trading at Scotia Capital.

“We had an upside day last Thursday which technically says we are overdue for a correction, but I just don’t think (the C$ upside) is over yet because I don’t think the pressure is off the U.S. dollar right now.”

Some experts even suggest the Canadian dollar could keep rallying until the U.S. Federal Reserve starts raising interest rates again, which it is not expected to do until the second half of 2010.

C$ NEAR UPSIDE LIMITS

But foreign investors may also opt to sell Canadian dollars and buy higher yielding growth sensitive currencies, a move that could boost to the Australian dollar and Norwegian crown and limit the upside for the Canadian currency. 

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