Toronto Gold Bullion Newsletter Archive - Daily FX report dated 13/01/2011

The Canadian dollar continues to trade above $1.01 today, reflecting what Finance Minister Jim Flaherty calls “the new world.” But there’s something of a debate over whether the loonie may be overvalued.

Mr. Flaherty said yesterday that the loonie’s strength is to be expected given Canada’s fiscal standing in the world and concerns over Europe’s debt crisis.

“This is the new world,” he told reporters. “It would be unreasonable given those fundamentals for anyone in Canada to expect the Canadian dollar to go back to the days when the Canadian dollar was so significantly devalued vis-a-vis the U.S. dollar.”

The currency is expected to remain around par for quite some time, though some observers believe it’s trading above where it should be.

“Certainly against the U.S. dollar, the Canadian is looking a little stretched here,” Shaun Osborne, chief currency strategist at TD Securities, told the Reuters news agency, predicting the loonie will slip back to parity. “We need to see something that justifies this strength, either by way of higher rates or another push up in commodity prices. We haven’t really seen anything new ... over the last few weeks that would justify this strength in the Canadian dollar being sustained.”

But currency strategist Camilla Sutton of Scotia Capital believes that, while the currency hasn’t strengthened just on fundamentals, there are many reasons for it to be deemed fairly valued. Investors are looking for alternatives to the U.S. dollar and euro, she said, while Canada’s fiscal standing is seen as strong.

BMO Nesbitt Burns deputy chief economist said the loonie is probably not yet strong enough to affect the Bank of Canada or the outlook for interest rates. The central bank's latest projection for the dollar was that it would average 98 cents in the current quarter but that oil prices would average $84 (U.S.).

"My old rule of thumb is that for every $10 rise in oil price, the C$ should rise 3 to 5 cents - and the overshoot in oil 'should' leave the currency at $1.01," Mr. Porter said.

"Having said all that, the bank is no doubt leery about inflaming the currency's furious start to 2011, and will likely temper any hawkish noises in next week's rate announcement and [monetary policy report]."

" USD- Initial jobless claims increased, trade balance narrows in November .."..

The number of first-time claims for unemployment insurance payments jumped in the first week of 2011 to the highest level since October as more Americans lined up to file following the holidays.

Initial jobless claims rose by 35,000 to 445,000, according to Labor Department data released today. The average number of applications over the past four weeks, a less-volatile gauge, increased to 416,500.

Today’s figures follow a report last week showing the U.S. added fewer jobs than forecast in December, underscoring the concern of Federal Reserve policy makers about the labor market. Economic growth may need to accelerate further and encourage companies to ramp up the hiring necessary to reduce the unemployment rate.

“Firms won’t go out and hire a lot of people until they’re confident that demand is increasing,” Scott Brown, chief economist at Raymond James & Associates Inc. in St. Petersburg, Florida, said before the report. “Demand is improving but it isn’t enough.”

The U.S. trade deficit unexpectedly narrowed in November to the lowest level in 10 months as faster growth overseas and a weaker dollar boosted demand for American- made aircraft and industrial supplies like cotton.

The gap shrank 0.3 percent to $38.3 billion, less than the $40.5 billion, Commerce Department figures showed today in Washington. Exports climbed to the highest level in more than two years.

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