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21 May

Is that it for parity? By Andrew Flynn, The Canadian Press


Posted by: Kimberly Walker

TORONTO – The loonie has been living up to its name in recent weeks, swooping crazily from just above parity with the U.S. greenback to well below as it navigates a violently turbulent global economy.

The Canadian dollar’s latest move was a 2.12-cent retreat, as panicky currency traders looked for somewhere safe to park their cash while volatility rocks the world’s markets.

The biggest concern for weeks has been the threat of economic instability in Europe, with the possibility that Greece might default on its debts. Even if it doesn’t — thanks in part to a $1-trillion European Union rescue package — similar troubles in other member countries could still stall the global economic recovery.

Despite the relatively robust health of the domestic economy, the loonie has now fallen nearly four cents in little more than a week and nearly seven cents since late April, when it hovered around parity with the U.S. dollar.

“Canada is as unaffected as a country can be but that’s not to say it’s completely unaffected, because ultimately as we learned in the credit crunch if things were to get really quite bad, you do see every country in the world sucked into this thing,” said Eric Lascelles, chief strategist at TD Securities.

“It’s not a statement whatsoever against Canada, against the Canadian economy or against the currency directly — it really is a natural consequence of crisis which generally results in a flight to safe-haven currencies and, rightly or wrongly, the U.S. dollar is that currency right now.”

While the loonie appears to be taking it on the chin, that doesn’t mean it won’t bounce right back up to parity when the hurricane of uncertainty dies down and traders climb out of their risk-aversion bunkers, Scotia Capital currency strategist Camilla Sutton wrote in a note to clients.

“Though we continue to believe that the medium-term outlook for the U.S.-Canadian dollar is intact for another run at parity, until risk aversion abates (the U.S. dollar) is vulnerable to a push higher” against the loonie, Sutton wrote.

While that shouldn’t have much impact on the Bank of Canada’s plans to raise interest rates, “we think the market is still highly sensitive to the Bank of Canada decision on June 1,” she added. That makes it a little less likely — somewhere around a 50-50 chance — that the central bank will raise rates from their rock-bottom 0.25 per cent on June 1, waiting instead to do so in July.