The U.S. dollar continued to flatten the loonie and every other significant currency except the Japanese yen Wednesday, as hedge funds and other punters continued to unwind foreign investments and buy greenbacks as a prelude to repatriating the proceeds.
As Asian, European and then North American equity markets continued tanking, the Canadian dollar plunged to close at 79.70 cents (U.S.), down 2.69 cents from Tuesday's official Bank of Canada close and 4.06 cents from Monday.
The performance extended a series of recent three-year lows for the loonie, which just last November hit an all-time high of $1.10.
“This market is an absolute freight train, and there's no standing in the way of it,” said Steven Butler, director of foreign exchange trading at Scotia Capital Markets in Toronto. “Canada was one of the worst performers overnight.”
Several foreign exchange traders also said the fluctuations in currency values are being magnified by much lower than usual trading volumes – only 40 per cent of normal levels, according to one estimate –and by the fact that, at this point, very few punters are short-selling the greenback in the belief that it is going to start falling again in the near future.
At 79.70 cents, it cost $1.2547 (Canadian) to buy $1 (U.S.) compared with $1.1937 (Canadian) at Monday's close – and one British currency specialist said he thinks the greenback could strengthen to the point it is worth $1.30 within as little as a week.
“Given that in the last three weeks we've gone from about $1.05 to $1.25, it may be just a matter of a week or so until we see it moving into that kind of area,” Ian Stannard, a currency strategist at BNP Paribas in London, said in a telephone interview.
The loonie's continued plunge was partly fuelled by the Bank of Canada's move Tuesday to chop its benchmark interest rate by another quarter of a percentage point and strong signals it gave that more cuts are in store, making Canadian-dollar investments less attractive to currency buyers.
As well, the prices of oil and gold and other commodities, key drivers of the loonie's surge in recent years, fell again Wednesday amid more signs of a global economic slowdown.
But as has been the case for much of the past couple of weeks, the real story had more to do with U.S.-dollar strength than Canadian-dollar weakness.
“U.S. investors had been heavily invested in overseas and emerging markets,” Mr. Stannard said. “But we're now seeing financial market tensions picking up in central and eastern Europe, where liquidity issues are arising . . . and that's providing support for the U.S. dollar right now.”
During the global boom, there was plenty of “cheap U.S. liquidity,” and that was used to fund positions in higher-risk, higher-yielding assets in emerging markets in Europe and elsewhere, he said.
Now, however, as funds' appetite for risk has vaporized, the process is being reversed.
“People are being forced out of these positions and have to buy U.S. dollars – that's why we're seeing such demand,” he said.
The euro, meanwhile, is under pressure because the problems in emerging central and eastern European markets “are right in its backyard.”
The European currency fell as far as $1.2743 overnight, its first break below $1.28 in nearly two years and down nearly 3.2 cents from Tuesday's close.
Maria Jones, a currency trader at Toronto-Dominion Bank, said the greenback's steep climb also stems from the fact the repatriation is almost all going one way.
“There's very few people putting on short dollar positions right now,” she said. “They're seeing the volatility and they're basically stepping aside, whereas in an ordinary market you'd have people taking the other side of the trade.”
As well, with volumes down, “a big trade can push the market more than it [normally] might,” she said.
Because there is no central exchange for currencies, its tough to get a good fix on just how many dollars, euros, loonies and pounds are changing hands on a given day.
A trader at another Canadian bank said big institutions tend to estimate this by extrapolating from their own trading volumes to the broader market.
“Just looking at our own trading, we know liquidity is down,” he said.
Scotia Capital's Mr. Butler said that investors are also hoarding U.S. dollars.
“Lending is loosening up, but they still want to make sure they have lots of dollar liquidity – for redemptions if they're mutual funds or hedge funds,” he said.
One small saving grace for the loonie is that it has performed better against the greenback than the Australian dollar, another resources-driven currency.
“Compared to the Aussie, we're not doing too badly,” Mr. Butler said. “It's down about 20 per cent in the last month and CAD is down about 17 per cent,” he said. “But, from the peak, the Aussie is down about 30 per cent and CAD is down only about 20 per cent.”
Julian Jessop, chief international economist at Capital Economics in London, cited several other reasons for the greenback's strength, and said each of them also is “consistent” with the yen's strength.
“The most important is the growing recognition that, even though the U.S. may have led the way, the rest of the world is now heading for recession, too,” he said in a note to clients Wednesday. Japan is in a better position, however, because it has avoided “imbalances” in household savings and government deficits that are plaguing Britain, for example. As a result, the Asian nation “should be among the first to recover as the global inflation shock fades,” he said.
Echoing other economists and currency strategists in recent weeks, Mr. Jessop also said the U.S. dollar has actually become a safe haven.
“Even though the global crisis has been triggered by problems in the U.S. sub-prime mortgage market, U.S. policy-makers seem better able to deal with the economic fall-out than their counterparts elsewhere,” he said. “In particular, the [Federal Reserve Board's] dual mandate has allowed it to cut interest rates aggressively.”
As well, Mr. Jessop said, the collapse in commodity prices, which are usually denominated in U.S. dollars, is “feeding back into a stronger dollar, and vice versa.”
The net result of the greenback's strength is that he has revised a number of his key forecasts.
He is now betting that the euro, for instance, will fall to $1.20 (U.S.) from its current level by the middle of next year, rather than to $1.25 as he previously forecast. He has cut his target for Brent crude oil – currently about $67 a barrel –for the same period to just $50 a barrel from $70, and now sees gold at $550 an ounce rather than $700.