Loonie climbs above $1.10

In just over a month the Canadian dollar has moved from 98 US cents to $1.10 US on Wednesday, sparking record trading in the overseas market.

Among the factors contributing to the steep rise in the loonie are record oil prices, approaching $97 a barrel, competitive interest rates, a stable economy that encourages investment and a steep decline in the value of the US dollar.

While this news is good for cross border consumers, it is causing a lot of concern for manufacturers and exporters. Many of them have been advocating for an interest rate cut to stem the rise in the Canadian dollar, but their hopes were dashed on Tuesday afternoon after Bank of Canada Senior Deputy Governor Paul Jenkins indicated that there will not be a cut in interest rates.

Some analysts are suggesting that the Canadian dollar is overvalued by as much as 10% and are predicting a sharp decline over the next year.

“It's overvalued,” said Rebecca Patterson, global currency strategist at JP Morgan in New York. She's advising her clients that the loonie will slide over the next year.
...
A Bank of Canada-based model that uses interest rate differentials and commodity prices to determine fair value shows the currency is 10 per cent overvalued, said David Powell, currency strategist at Idea Global in New York.

“The Canadian dollar is well overvalued by most conventional measures,” he said. About two-fifths of the U.S. dollar's decline against the Canadian currency is due to general U.S.-dollar weakness, he estimated.

Despite this, it looks like it will be a good season for consumers. Many retailers, such as Sears have already lowered prices, and some car dealerships are also following through in an effort to stem the tide of cross border shoppers. Many have also started giving consumers the benefit of the 1% GST cut, even though it will not take place until January 1st.

For travellers going abroad, the benefit of the strong Canadian dollar will be enormous. Itravel2000, Canada's largers independent online travel retailer, is reporting a significant rise in Canadian bookings to southern destinations such as Mexico and the Dominican Republic. Many US retailers in border towns and cities are also reporting a significant increase in Canadian customers and are already offering special promotions to lure their business.