The Canadian dollarâ€™s reign as the best-performing major currency over the past six months is in jeopardy as rising consumer debt loads collide with plans by Bank of Canada Governor Mark Carney to increase interest rates.
While international investors typically favor currencies with high rates for the potential for greater returns, traders are signaling that in Canada it would do little more than damage an economy underpinned by debt. Household borrowing was 152.9 percent of disposable income at the end of last year, climbing from about 135 percent in 2007 and exceeding the U.S.â€™s 145 percent, according to data compiled by Bloomberg.
â€œSo much of Canadian growth is led by domestic demand and that domestic demand is led by consumer spending and consumer spending is linked to expanded leverage,â€ Shahab Jalinoos, a senior currency strategist in Stamford Connecticut at UBS AG, said in an interview April 24.
Strategists predict the currency will depreciate to parity with the U.S. dollar by March even as Carney reiterated last week that increasing rates may be â€œappropriateâ€ as the economy moves closer to full recovery. Options traders are paying the highest premiums since January for protection against the so- called loonie weakening amid forecasts for higher volatility, which tends to dim the appeal of currencies. UBS sees it falling to C$1.05 per U.S. dollar by year-end from 98.01 cents.
This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.