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Time to Get Serious About the Loonie

Friday, 8 Jul 2011 | 12:36 PM ET
The Syncrude oil sands extraction facility near the town of Fort McMurray in Alberta Province, Canada.
Mark Ralston | AFP | Getty Images
The Syncrude oil sands extraction facility near the town of Fort McMurray in Alberta Province, Canada.

The Canadian dollar could face near-term headwinds, this strategist says — but after that, prepare for liftoff.

I hope you saw the Canadian dollar getting that nice lift earlier today — or maybe you blinked and missed it. A stronger than expected employment report earlier this week pushed it up nicely, for a little while. But then came Friday's lousy U.S. payroll data, and the U.S. dollar jumped as investors became risk averse. Things are calming down, but the question remains: which way is the loonie headed?

Simon Derrick, head of currency research at Bank of New York Mellon, says it depends on your timing, your view on oil, and Canada's southern neighbor.

"If there is a slowdown in the U.S., it will be reflected in the Canadian dollar," Derrick says. "Can U.S. dollar-Canadian dollar get back to parity? Probably yes, in the next three to four months," he told me.

Long term, though, Derrick is seriously bullish on the loonie. The Canadian dollar "provides a great proxy for oil," he says, with some of the largest reserves in the world. And if energy security remains an issue, as he expects it will, the Canadian dollar will almost certainly get a major lift.

"Do I see dollar-Canadian dollar making a run toward 0.90? Yes, absolutely," he says, and expects that to happen probably in 2012.

David Watt, a senior currency strategist at RBC Capital Markets, is also bullish on the Canadian dollar, and believes U.S. dollar-Canadian dollar will reach 0.94, but he's less certain about the near-term outlook than he was before today's U.S. employment report. He does expect the Bank of Canada to hike interest rates again, though he says, "that is a view less firmly held than before." He expects the bank's next monetary policy report, due out July 20, to provide crucial clues to the loonie's prospects.

Bottom line: decide your time horizon and your view on oil, and trade accordingly.

MULTI CURRENCIES vs. The Dollar

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