With the US dollar in a general bear market decline since about 2001, more and more speculation and trading is beginning to reflect lower expectations for the greenback as a result of the US Fed’s unprecedented levels of “quantitative easing” and fiscal stimulus.
This has Canadians enjoying the resulting higher values in the loonie and greater purchasing power for travel south of the border, as well as shopping, investing and other purchases of US assets – including, perhaps, the purchase of distressed real estate in the form of nice condos in sunny Florida, Nevada and Hawaii.
A favorite question of currency analysts on Bay St and individual investors is thus: how long can we expect the rally in the loonie to continue?
How High Can the Canadian Dollar Go?
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Historical records kept by the Bank of Canada since 1949 show that the highest the Canadian dollar has ever risen against the US dollar was on November 6, 2007 - when one US dollar could only buy 92.15 cents Canadian, or conversely, the loonie was able to buy about 1.078 US dollars in nominal terms.
This US dollar slump wasn’t even the result of the Great Recession – just good old fashioned weakness in the greenback probably factoring in the negative expectations for the US economy ahead of time – don’t forget, the credit crisis already definitively began in August 2007 (even there, bad smells were already in the air as early as May 2007). Back then, for a whole year before the “real” collapse finally happened, tons of analysts already knew what was coming down the pipeline. What they didn’t expect was that the world would rush to the US dollar for safety (and largely as a result of so many hedge funds unwinding their short positions and margin calls).
What Makes the Loonie Rise and Fall Against the US Dollar?
How Low Can the Canadian Dollar Go?
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The same charts from the Bank of Canada show that the lowest the loonie has ever sunk since 1949 was January 18, 2002 – when one US dollar bought a whopping $1.6125 Canadian.
Reasons for this terrible slump were probably related to the 9/11 war on terror aftermath and an increasing sense of protectionism south of the border. If you look up the records, there were probably trade bans on Canadian beef or lumber at this time, too.
When To Buy US Dollars and Take Advantage of the USD/CAD Exchange Rate
Notice anything in common between these two extremes?
How about the fact that the highest high and the lowest low have both occurred in the last seven (7!) years. Out of all the data since 1949. This is proof to me of the increasing volatility as a result of even more interconnected global financial markets following the information technology boom of the 21st century. Real-time, online currency data reporting. Do-it-yourself day traders using electronic trading platforms. The financial industry has undergone vast changes in the last decade. Like the weather expectations on global warming theory, these swings from one extreme to the other might get wider and wider.
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{ 2 comments… read them below or add one }
Do you anticipate the Canadian dollar doing well long term against the dollar? Many believe so since the Canadian economy is heavily backed by commodities. What are your thoughts?
Well unless basic mathematics no longer applies, the Canadian dollar should be valued at least where it is and probably a bit higher going forward. Unless the U.S. fundamentals are substantially fixed there is no logical reason for the U.S. dollar to become stronger because it can’t. Right now, this is what the Fed wants anyway since supposedly it will help U.S. exports and hopefully the U.S. economy.