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The Canadian dollar fell from record highs above the $1.10 (U.S.) mark to close Wednesday's session lower as the market grappled with the currency's rapid runup to levels analysts consider to be above its fair value.
“The market finally realized we had reached the limit of the overvaluation of the Canadian dollar,” David Powell, a currency analyst at IDEAglobal in New York, said in an interview. “It was questioning just how much longer this could really go on.”
The loonie soared to $1.1024 in morning action, up almost two full cents from Tuesday's record close of $1.0852. It pared those gains in afternoon trading and eventually settled the session at $1.0775, down 0.77 of a cent.
Mr. Powell said the loonie neared the key psychological $1.111 level before traders pulled back. “Essentially, it was the approach to that number which really got the market scared about the Canadian dollar being over valued,” he said. “It is a scare about the run having gone too far. People saw this as the last level of support.”
Oil Future Jan'09
The loonie's gains on Tuesday came as oil prices approached a record $96 a barrel amid tight supplies.
Gold Future Feb'09
Gold meanwhile continued is rise as well, surging above $845 an ounce.
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He pegged $1.052 level as the next number to watch. “If the loonie breaks above that tomorrow, it would suggest that a deeper correction is in place and a move back to parity likely,” Mr. Powell said.
The loonie's surge prompted Prime Minister Stephen Harper to express concern for the first time.
“The appreciation we've seen is rapid by any standard, unprecedented in its rapidity by any standard, and I think it does require some reflection,” he said in Vancouver Wednesday.
“The prime minister doesn't typically comment on the Canadian dollar, other than to say it's clear that it has some advantages and some real significant disadvantages for certain sectors and we are concerned, we share those concerns,” he said
The early Canadian dollar gains to above the $1.10 mark on Wednesday came as China's move to diversify its $1.43-trillion in foreign reserves caused a sharp drop in the U.S. dollar.
The greenback fell the most since September against the currencies of its six biggest trading partners, according to Bloomberg. That, in turn, sent the price of oil briefly above $98 a barrel and gold surging above $845 — making Canada's commodity-linked currency all the more attractive.
“All of these developments are like catnip for the Canadian dollar, which has quite simply broken free from any restraints,” said Douglas Porter, deputy chief economist at BMO Nesbitt Burns Inc., in a note.
Maria Jones, a foreign-exchange strategist at TD Securities, said the loonie was swept up in the selling triggered by oil prices that came off their day's high. “The Canadian dollar also been caught up in a general pick-up in risk aversion - which has weakened all of the commodity-linked currencies.”
Some of the day's selling was technical, she said. The U.S. dollar strengthened late in the session, as people reconsidered the extend of its recent weakness.
“The market has been caught long on Canadian dollars,” Ms. Jones said. “Currency traders saw that oil had come off and thought it might be a good time to take some profits, because the Canadian dollar has come so far so fast. The U.S. dollar strengthened on some profit-taking.”
Ms. Jones said the loonie could see more losses on Thursday. “I think we can see this correction go a little further,” she said. “Because traders are so short on U.S. dollars, that could drive things too.”
With files from Reuters and Bloomberg.
