Likely increases in the Bank of Canada’s overnight rate and continued strength in the price of oil and other commodities will help the Canadian dollar surge as one of the strongest currencies in the world.
Brandon McGrath, manager of business solutions at Victoria-based Custom House, a Western Union company, said in an interview that risk sentiment in the market has contributed to the dollar’s strength over the past six weeks, and an expected increase in interest rates next month is likely to put upward pressure on the dollar versus other major currencies including the U.S.
In the short to medium term, the stronger price of oil is also expected to underlie the loonie’s rise, although, with economists expecting lower oil prices next year, that pressure may subside.
“But if inflation gets out of hand, the Bank of Canada is going to have to raise rates,” said McGrath, “and rising rates are the main driver of currency appreciation.”
Even if the loonie rises, volatility will remain high against historical norms. McGrath noted volatility between the U.S. and Canadian currencies typically ranged between 6% to 8% prior to the credit crisis. Today, it is 10% to 16%. “It’s been that way for a year now and it does seem like the new norm.”
Volatility has also risen between the loonie and the euro, which has ranged between 12% and 15% in the last few weeks, given the uncertainty over the solvency of Greece, Spain and Portugal.
He said hedging would remain a necessity for businesses that conduct business in other currencies. “With volatility so high, options are a good option to use, because it not only locks in a protected exchange rate, but it can provide some participation on the upside.”