Predictions Canadian Dollar 2008

Forecasts for Canadian Dollar

With the Canadian dollar reaching a 130 year high, (Canadian Dollar reaches highest level since 1800 – Reuters) many are asking when the loonies upward momentum will end.

The strength of the Canadian dollar is being pushed by several factors:

Strong price of commodities such as oil, and precious metals. – With a booming Chinese economy, commodity prices are likely to continue being high. This will provide a long term underpinning of the Canadian dollar. If the world economy does enter recession, we can expect to see a slow down in commodity price growth, however, at the moment that is unlikely. The Chinese and Indian economies will take any slack from a weaker US economy.

The Weakness of the US dollar and economy. Underlying weaknesses in the US dollar are the main reason behind the strength of the loonie. Worries over the future of the US economy stem, in large part, from the housing market bust. If the US economy does slide into recession, this would lead to a further fall in US interest rates and therefore, cause a further deterioration in the value of the US dollar. However, despite what the doom mongers predict, the US is not heading towards an imminent collapse. Economic Growth in the Summer, posted a rather unexpected 3.9% – Whilst this is likely to moderate in the future, it is hardly an indication of imminent recession that so many people predict.

Speculation. This is the unknown quantity behind the rise of the Canadian dollar. The meteoric rise of the loonie, is encouraging some speculators to cash in on its rising value. This could lead to a bubble effect, with the potential for a future fall. Personally, I feel that at the moment most of the loonie’s rise is due to economic fundamentals. However, if the loonie keeps rising above its current value, it may be due to an increasing speculative effect.

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