Loonie Advances on EU and US Stimulus Measures Expectations

on Jul 16, 2012
Updated: Feb 25, 2022

On 14 July 2012, Bloomberg reported that the Canadian dollar, commonly referred to as the loonie, rose against nine of its 16 major counterparts reaching a lifetime high against the euro. The main reason for the strong performance of Canada’s dollar are indications that both the European Central Bank (ECB) and the US Federal Reserve may take additional steps to sustain wavering economic growth.

The Canadian dollar rose 0.5 percent according to the Bloomberg Correlation-Weighted Indexes, reaching C$1.0141 per U.S. dollar in Toronto. It also touched C$1.2378 per euro, which is the highest level since 1999 when the common European currency began trading. This year, the loonie has traded as strongly as 98 cents per US dollar on April 27 and as weakly as C$1.0447 on June 4.

!m[](/uploads/story/149/thumbs/pic_1_inline.png)The rise of the Canadian dollar against the majority of its most-traded peers comes ahead of a Bank of Canada meeting when interest rates are to be determined. According to a Bloomberg survey of 19 economists, the Canadian central bank is likely to raise its one percent overnight target rate by a quarter-percentage point by the second quarter of 2013.

Among the reasons cited for the Canadian dollar’s rally is the forecast that the ECB is likely to further increase monetary stimulus. On July 5, the ECB cuts its benchmark rate to a record low with the purpose of lowering the borrowing costs for struggling Eurozone banks. According to a Medley Global Advisors report, obtained by Bloomberg News, the ECB is prepared to further ease monetary policy, if the Eurozone crisis worsens.

In addition to the anticipated stimulus measures on the behalf of the ECB, there is speculation that the Fed might also do something to stimulate the US economy growth. Bloomberg reports that the Fed released minutes from its June meeting, with the information in question indicating that some policy makers might be in favour of additional stimulus.

Apart from the US and Europe, signs of China’s slowed economic growth for a sixth successive quarter have also spurred hopes that the Chinese Premier Wen Jiabao will introduce stimulus so as to secure an economic rebound.
It seems that the loonie is projected to rise yet further, with Bloomberg reporting the forecast of JPMorgan Chase & Co (JPM), estimating that the Canadian dollar may continue to strengthen against the euro after monthly averages crossed a technical level. Niall O’Connor, a New York-based technical analyst at the firm, wrote in a note to clients that the Canadian dollar may rise to as much as C$1.2150 against the euro.
The other main factor largely determining the performance of the loonie is the crude oil price, since it is Canada’s biggest export. According to Bloomberg, correlation studies have shown that the Canadian dollar is becoming more governed by fluctuations in crude oil prices. Crude oil futures rose 3.1 percent to $87.07 a barrel in New York, contributing to the Canadian dollar rally.