Most of last year, the Canadian dollar was pummeled by falling commodity prices. Since Canada exports so many widely-used commodities like oil and lumber, lower prices mean lower profit margins.
Now, in 2009, the Canadian dollar — known as the "loonie" — is being dealt another blow. This time, it's the worsening slowdown of the U.S. economy.
In February, the U.S. unemployment rate bolted to 8.1 percent in February from 7.6 in January. That's the highest since late 1983, as cost-cutting employers slashed 651,000 jobs amid a deepening recession.
Since the recession began in December 2007, the U.S. economy has lost an astounding 4.4 million jobs, more than half of which occurred in the past four months. The United States hasn't had three back-to-back months of layoffs this big since it started keeping records on employment back in 1939.
On top of this, to buffer the blow of the slowdown, Canada's central bank chopped interest rates to 0.50 pecent.
While this is a dynamic that will eventually be good for the Canadian economy, it hurts their currency right now.
Canada has said they may implore "quantitative easing." In simple terms, that means they will print money out of thin air and load up the banks with so much excess cash that they are more likely to lend money and thus spur economic growth.
While that may eventually give the Canadian economy a boost, it kills their currency. Any time something becomes more abundant, it becomes worth less. Any time something becomes scarce, it becomes more valuable.
So, when the market is flooded with more money, that money gets devalued and is worth less: It takes more Canadian dollars to buy the same amount of goods.
The U.S. dollar presently benefits from what is called the "safe haven bid." That means investors worldwide are running to the safety of the U.S. dollar because it's the world's reserve currency right now.
Once the global economy finally returns to normal, this benefit will disappear and the dollar will have to stand on its own fundamentals once again. We all know that once that happens, the buck won't have that much to stand on. So, the "dollar party" may come to an end, once the global economy normalizes.
In the mean time, Canada's currency and economy will continue to suffer as U.S. businesses lay off more workers and the economy continues to slow. Remember, Canada derives 79 percent of its exports from the United States.
When you add all of this up, you come up with the fact that the U.S. dollar has a high probability of continuing to rise against the Canadian dollar. So don't be surprised to see the USD/CAD rate to break the 1.30 barrier in the coming weeks to months.
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