[NYTr] Rise in Canadian dollar shows break with US economy

[All the News That Doesn't Fit]

Bloomberg - Sep 17, 2007
http://quote.bloomberg.com/apps/news?pid=20601087&sid=a6uPcUFdLnao

Rise in Canadian dollar shows break with U.S. economy

By Haris Anwar

TORONTO -- Currency traders are concluding that there's nothing the
U.S. economy can do that Canada's can't do better. Much better.

The U.S. and Canadian dollars, which traded in tandem 94 percent
of the time since 2000, decoupled in May and now have diverged for
the longest stretch this decade, according to data compiled by
Bloomberg.

While the worst housing slump in 16 years threatens to slow U.S.
growth, record oil prices and rising costs for copper and zinc are
boosting Canada's exports and allowing the government to balance
its budget. Energy accounted for 19 percent of Canada's exports
this year, compared with 12 percent in 2002, government data shows.

"Canada is in a very strong position," said John Taylor, chairman
of New York-based FX Concepts Inc., which manages $12.1 billion in
currencies. "Its economy has significantly diverged from the U.S.,
and it's got all those things the world needs. My longer-term bias
is that the Canadian dollar would be stronger than the dollar."

Canada's currency, nicknamed the loonie after the image of the
national bird on the one-dollar coin, has risen 3.7 percent against
its U.S. counterpart since June 12 amid growing speculation that
losses related to U.S. subprime mortgages would prompt the Federal
Reserve to cut interest rates.

Of the 16 most traded currencies, none has done better than the
loonie this year. It gained 13 percent, climbing to a 30-year high
of 97.30 U.S. cents on Sept. 14. The currency rebounded from a low
of 61.80 cents in January 2002.

Futures show hedge funds and large speculators are raising bets
that the Canadian dollar will extend its gains. Investors held a
net 58,754 contracts on a rise in the currency as of Sept. 11 on
the Chicago Mercantile Exchange, up 14 percent from the prior week,
according to the Washington-based Commodity Futures Trading Commission.

The U.S. and Canadian dollars rose and fell against the euro in
similar patterns 94 percent of the time since the introduction of
Europe's single currency in 1999 until May. The Canadian dollar has
mirrored the euro's gains against the U.S. for more than three
months.

The currency climbed 2.4 percent last week amid speculation in the
futures markets that Bank of Canada Governor David Dodge will hold
the key lending rate at 4.5 percent this year, while the U.S. Federal
Reserve cuts its target for overnight loans between banks from 5.25
percent.

Two-year Canadian bonds yield more than Treasuries for the first
time since 2004, adding to the currency's appeal.

Canada can't escape a slowdown in the U.S., said David Mozina,
senior currency strategist at Lehman Brothers Holdings Inc. in New
York, the world's fourth biggest securities firm by market value.
He recommends selling the Canadian dollar against the Norwegian
krone, the Japanese yen and the Swiss franc.

"It's a matter of time before the negative events spill over the
border," said Mozina. "The monetary policy is joined at the hip.
It's a matter of time when people start penciling in a rate cut by
the Bank of Canada.''

In the meantime, rising prices of oil, copper and gold are fueling
Canada's economy and reducing its reliance on U.S. manufacturers.
The oil sands in Alberta contain the largest crude deposits outside
the Middle East, and Canada is the world's No. 2 producer of nickel
and zinc.

Oil trades at $80 a barrel compared with about $30 at the beginning
of 2003, while gold has doubled to more than $700 an ounce. Zinc
prices have soared over the same period to about $3,000 a ton from
$750. Copper for delivery in three months costs about $7,500 a ton,
compared with $1,600 four years ago.

Auto-part exports mainly to Detroit-based General Motors Corp.,
Dearborn, Michigan-based Ford Motor Co. and Chrysler LLC of Auburn
Hills, Michigan, accounted for 17 percent of Canadian exports, down
from 26 percent in 2000.

Canada's economy is set to expand 2.5 percent this year, outperforming
the U.S. for the first time in five years, according to a Bloomberg
survey this month.

"Canada is a current-account surplus country. Its fundamentals are
sound," said Samarjit Shankar, director of global strategy for the
global markets group in Boston at Bank of New York Mellon, the
world's largest custodian bank, with more than $20 trillion in
assets under administration. "Global investors are not cutting and
running from their Canadian exposure. That suggests that the Canadian
dollar should remain well-supported."

Shankar predicts that the loonie will achieve parity with the U.S.
dollar early next year.

Rising tax revenue and energy royalties have allowed the Canadian
government to post 10 straight budget surpluses, the only country
among the Group of Eight nations with a balanced account. Canada's
total consolidated revenue rose 25 percent during the past five
years to C$601.26 billion.

The government has used the excess to pay down about C$90 billion
in debt over the past decade. The U.S. had a budget deficit of
$318.6 billion last year.

"The Canadian dollar has held up much better than many other
currencies," said Eric Takaha, who helps manage about $160 billion
at Franklin Resources Inc. in San Mateo, California. "We've been
constructive on the Canadian dollar, and will hold on to our long
position."