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Further weakening seen for loonie

The Canadian dollar, which has already taken a beating in the past month, is likely to see further downside before stability returns to foreign exchange markets.

Barring a major reversal in investor sentiment, the Canadian dollar is on course to see its biggest monthly decline since at least 1950, market watchers say.

On Oct. 28, the Canadian currency was trading at US77.57 cents. This compares to Oct. 1, when the Canadian dollar closed out the North American trading session at US94.10 (US$1=C$1.0626).

Steve Malyon, currency strategist with Scotia Capital, said the unprecedented level of volatility in foreign exchange markets has made it extremely difficult to predict near-and long-term ranges for the Canadian currency.

In the next four to eight weeks, a trading range anywhere between US85 cents and US75 cents is a possibility for the Canadian dollar, said Malyon. The most likely scenario, however, is further weakening to the lower end of that range, he said.

Looking further out to six months, Malyon said he would not rule out a move to US70 cents for the Canadian dollar.

“I would be surprised to see us get that weak over the next six months, because over that period I think we might see a bit of U. S. dollar weakness resume to maybe stabilize the situation. However, we’re already below 79 cents, so 70 cents is not out of the realm of the possible,” Malyon said.

Until then, expect to see many of the same factors driving the Canadian dollar as those currently at play, he said.

“The global economic crisis is primarily what has been driving the foreign exchange market,” Malyon said.

The tightening credit market and the downside risk to global growth have created demand for the U. S. dollar, as well as the Japanese yen, and that has hurt a number of cyclical currencies, including the Canadian dollar, he explained.

The price of commodities, particularly crude oil, will also continue to influence the level of the Canadian dollar.

“I think that we are still in the relatively early stages of what is probably going to be a relatively prolonged global growth slowdown and so it is difficult to be optimistic about where commodity prices are going to head in this environment,” Malyon said.

Once a degree of calm has returned to global markets, however, Malyon said the Canadian currency may come to rest around the US85 cent mark, a level which some suggest is a fair valuation for the Canadian dollar.

Since shooting higher in the fall of 2007, the Canadian dollar has been correcting lower, Malyon said. In part, the Canadian dollar’s downward move has reflected the currency’s search for a better equilibrium.

It is now possible, however, that the Canadian dollar has overshot that mark, he continued.

Assessing a currency’s fair market is extremely difficult because there is no consensus as to which measure, for example purchasing power, is the correct yardstick, Malyon said.

That said, over the long run 70 to 75 cents would be too weak for the Canadian currency given Canada’s structural advantages, he said.

“A lot of the things that afflicted the U. S. economy don’t afflict the Canadian economy. We have a fiscal balance, we have a current account balance and we’re richly endowed with natural resources and I think that once this global slowdown runs its course, commodity prices are going to resume climbing,” Malyon said.

“I think when we are all through this, the Canadian dollar is likely to look quite strong but right now the cyclical forces are certainly overtaking things and are dominating where currencies traded,” he continued.

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