The Canadian dollar really kicked some currency in November. Really.
The casual observer can be excused for having doubts, looking strictly at how the Canadian dollar has done in U.S.-dollar terms. The loonie dipped slightly last month against the greenback, which came back into favour among foreign-exchange traders following its deep selloff in September and October.
Yet aside from the widely quoted U.S. comparison, the Canadian dollar dominated other major currencies last month. According to Bank of Canada data, the loonie gained 2.4 per cent in November against a trade-weighted basket of major currencies excluding the U.S. dollar – and was up 3.1 per cent if Dec. 1 is included. (Indeed, if Dec. 1 is added to the November mix, the Canadian dollar edged the U.S. dollar, too.)
What's more, the rally looks to be based on more than just the commodity gains, gold fever, European risk fears, rate-differential expectations and U.S. dollar devaluation that have been key factors in the Canadian dollar's upturn over the past several months. The underlying economic fundamentals are building a case for further Canadian dollar strength in the coming months.
Riding the U.S. data
Matthew Strauss, senior currency strategist at RBC Dominion Securities, noted in a research report that the Canadian dollar went along for the ride when sentiment turned in favour of the U.S. dollar last month. Currency traders jumped back into the greenback after the U.S. Federal Reserve Board finally announced its long-awaited second round of quantitative easing – the anticipation of which had been a drag on the greenback – and as rising debt fears in Europe drove traders away from the euro.
But the strength in both currencies was also underpinned by a rising tide in the economic data, Mr. Strauss said. The positive surprises in the U.S. economic releases accelerated in the month – which improved not only the U.S. outlook but also that of Canada, which depends so heavily on trade with the United States.
"Even if the string of upside U.S. data surprises moderates in December, the groundwork had been laid for a reacceleration in U.S. growth, suggesting that Canada's trading partner has probably passed the slowest point in this recovery," he wrote.
Export outlook seen turning
The Canadian economic news was somewhat less bullish, in particular the third-quarter gross domestic product numbers, which showed an annualized growth pace of an anemic 1.0 per cent.
But Mr. Strauss argued that the GDP numbers largely reflected slumping export markets – domestic demand rose at a healthy 3.8-per-cent clip, but exports shaved 3.5 per cent off the quarter's growth rate. Given that the U.S. economic data has gained some steam and that the bulk of Canadian exports go to that market, "the drag [from exports on GDP growth] is expected to decline going forward."
"[Canadian dollar] outperformance should continue through December and into 2011," he concluded.