Loonie Tanking? What's Going On?

It’s a sign of the times. Who would have ever thought that when the Canadian dollar dips below $US 1.02, it would be described as “tanking” as it was this week?

But considering that the mighty loonie was soaring well beyond 5¢ above parity with the US greenback as recently as May 3rd, the Canadian dollar does actually seem a little bit feeble these days.

What’s going on? And what might happen next?

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Currency markets are about as difficult to make any sense of as are commodity markets. And in Canada’s case, the two are highly correlated. The fact that oil prices have pulled back somewhat (down about 10% from a few weeks ago) has something to do with it.

Also, the sovereign debt crisis in Europe is causing some concern, which pushes currency traders and investors to run for cover in the US dollar. The Canadian dollar is often just collateral damage when that happens.

The Canadian dollar still has a lot of things working in its favour, including a stable political situation, generally high commodity prices, and a federal government that has a good chance of moving back into a balanced budget over the next 4-5 years. Investors love that.

Currency exchange rates rise and fall, and some fluctuation is normal (especially when global events are volatile). The recent weakness in the loonie is not particularly reflective of a weak Canadian economy. And if oil prices start to climb again (as is largely expected), the Canadian dollar is still probably pointed higher—not lower—this summer.

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