Canadian Dollar Reaches 30-Year High

The Canadian Dollar is making a run at forex history, having reached a 30-year high against the USD this week.  The currency has appreciated by over 50% since 2002, and is up 9.4% this year alone.  The Loonie is surging on a combination of high commodity prices and attractive interest rates.  It is no coincidence that the price of oil has more than tripled over the five year period that the Loonie also appreciated in value.  In addition, the Bank of Canada is expected to raise interest rates two more times in the near-term which would bring its interest rate levels close to parity with US rates. The last time the Canadian currency, itself, stood at parity with the USD was in 1976. While it now seems inevitable that the currency will soon return to that marker, there are still hurdles that need to be cleared.  Bloomberg News reports:

“A strengthening currency has started to adversely affect the country’s growth, especially the manufacturing sector, which may raise concern the BOC needs to keep rates on hold.”

Read More: Canada Dollar Reaches 30-Year High on Outlook for Rate Increase

How to Value a Currency

With the US government doggedly clinging to the notion that China is manipulating its currency and insisting that the communist country be punished accordingly, it bears asking “how can we determine that a currency (in this case the Yuan) is in fact undervalued, and if so, by how much.  One notable economist has laid out three general techniques for “valuing a currency,” which may prove useful to all of you amateur economists.

How to Value a Currency

With the US government doggedly clinging to the notion that China is manipulating its currency and insisting that the communist country be punished accordingly, it bears asking “how can we determine that a currency (in this case the Yuan) is in fact undervalued, and if so, by how much.  One notable economist has laid out three general techniques for “valuing a currency,” which may prove useful to all of you amateur economists.
First, there is the concept known as “purchasing power parity,” which suggests that a pair of currencies

Bank of England Mulls Rate Hike

Since the beginning of 2007, the Bank of England has raised Britain’s benchmark interest rate by 50 basis points, to 5.50%.  While the Bank voted earlier this month to maintain rates at current levels, many analysts are speculating that it will resume hiking rates again in July.  A recent spate of economic data has supported the notion that Britain’s economy is on stable ground.  As a result, the specter of inflation is once again looming, and the Bank, which has a reputation for monetary hawkishness, will be quick to act if inflation stays above the Bank’s comfort level.  While the rate hike could certainly put a damper on Britain’s economy, it is likely to feed continued short-term interest in the Pound, is a viable risk-free alternative to the USD.

Read More: King comments send sterling climbing

Loonie could Reach Parity against USD

Last week, the Canadian Dollar traded at 94 cents against the USD, its highest level in over 30 years. This event is even more unbelievable considering the Loonie’s all time low against the USD occurred less than five years ago, in 2002.  Now, many analysts are cautiously optimistic that the Loonie will be trading at parity with the USD by year-end, and perhaps continue appreciating past that point.  Rising natural resources prices and a strong economy may drive Canada’s Central Bank to raise interest rates, at the same time that its neighbor to the south is contemplating lower rates.  However, not all analysts are quite so optimistic. The Associated Press reports:

But with an expected dampening in the industrial and manufacturing sector on its way, other analysts predict the Canadian dollar will start to weaken because commodity prices will pull back a bit and Canada’s economy may start to struggle because of the strength of the loonie.

Read More: Canadian dollar no longer ‘a weakling’

Economic Data Gives USD a Boost

Since reaching record-highs against the British Pound and Euro in April, the USD has pulled back slightly, due in part to the perception that the US economy is back in track. Last quarter’s round of GDP and housing data revealed that by some measures, the US economy was expanding at the slowest pace in years.  However, that notion was contradicted by last week’s release of