[cppene]

The sharp rally in the Canadian dollar since July has been flagged by the Bank of Canada as a downside risk to the economic outlook. In the third quarter, the currency’s move supported a sharp increase in imports of machinery and equipment. Even though exports rose for the first time in nine quarters, the trade balance still weighed down production. Going forward, the Bank worries that the strong currency will dampen demand for Canadian exports, further limiting economic growth. In the United States, the dollar’s continued downward drift is raising concern across the globe with several countries expressing worries about the impact of US dollar weakness. Despite these concerns, concerted direct FX intervention by governments is unlikely. Analysts expect that until a Fed rate hike is imminent, the U.S. dollar will remain under modest downward pressure, which argues for Canada’s dollar to drift toward parity, especially as commodity prices continue to rise with the global recovery gaining steam and Canada’s recovery builds momentum.