Loonie gyrates

Much of the blame for the Canadian dollar’s initial drop was laid on the possibility of a looming federal election. But Avery Shenfeld, senior economist at CIBC World Markets, downplayed that possibility.

“ The bigwigs in New York have barely registered that we might have an election in Canada and don’t really understand nonconfidence motions.”

After a few weeks of being driven by energy prices, the loonie’s fate is again being primarily determined by the U.S. dollar, Shenfeld added.

“ The oil story has lost its grip on the currency.”

Indeed, the loonie rallied yesterday despite the price of crude oil staying below $60 a barrel as well as a disappointing report showing a slowdown in Canadian residential- construction activity. Shaun Osborne, chief currency strategist at Scotia Capital, agreed that a possible election isn’t an issue right now in the foreign- exchange market. “When all is said and done, there is no guarantee we are going to get an election. And, fundamentally, Canada is still looking attractive.”

Specifically, a report last week showed Canada’s job market remains healthy, giving the Bank of Canada ample reason to continue raising interest rates.

Last month, the central bank raised its trend-setting overnight lending rate a quarter point, to 3 per cent, and is widely expected to take the key rate to 4 per cent by mid- 2006. As for the euro’s fortunes, the protests in France are a bit of a red herring, Osborne suggested.

“ Optically, the riots in Europe aren’t that good, but I don’t know that they are a huge problem for the euro,” he said.

“ They are just another stick to beat the currency with.” The euro traded at $1.1785 cents after falling to a two- year low of $ 1.1711 earlier in the day. The U. S. dollar has been gaining ground against major currencies in past weeks, partly on the expectation the U. S. Federal Reserve Board will continue to raise interest rates aggressively to stave off inflation pressures.

Yesterday’s selloff in U. S. dollars may be partly explained by investors repositioning themselves in preparation for the release tomorrow of the latest international trade numbers, said Nesbitt Burns’ Busch.

“ It’s pretty typical.”

Also, yesterday’s rioting in France wasn’t as bad as on prior days, offering hope for calm in coming days, he said.

“ It’s all these little things pushing for a U. S. dollar pullback.”