• USD/CAD Eyeing Near-Term Break Around 0.99
• Bank Of Canada Stick To Hawkish Stance
• CAD v. USD More Fairly Valued Closer To C$1.01?

So far this month, forex traders have seen the Canadian dollar occupying top spot as the best performing major against its US counterpart. The loonie has appreciating almost 1.6 percent to its best level since early May, the reasons for which - according to the BBH analyst team – being threefold. Firstly, the Bank of Canada has not backed away from its relatively hawkish stance, and the premium Canada offers over the US on two year money has risen to 95 basis points. Secondly, the CAD's correlation with oil prices is not particularly stable, plus, thirdly, its correlation to the US S&P 500 appears to be the most stable among the major currencies.

Commenting on the USD/CAD, BBH see a near-term break of 0.99 level, which opens the door for a move to the year's low near 0.98. "However,” conclude the boys at BBH, “barring a significant surprise on the July CPI data today, a consolidation is more likely flavor today".

Nonetheless, as the Canadian currency headed for its sixth consecutive weekly gain, (its longest winning streak since 2010) Neal Kimberley, FX market analyst for Reuters reckons the recent slide in the value of the greenback versus the loonie may be getting a little bit overdone.

“There is a case that the pair would be fairer value at just above parity,” opines Kimberley, “possibly closer to the present 100-day moving average at C$1.0090 than at Friday's level around C$ 0.9875.”

In reaching this assessment, Kimberley point to clouds gathering on the horizon of a Canadian economy that has, to date, performed relatively robustly. “Finance Minister Jim Flaherty may not be showing undue signs of worry about the strength of the Canadian dollar,” says Kimberley, “but he is exhibiting some concern about the outlook for export-dependent Canada. ‘Continuing economic headwinds from outside the country could easily throw us off course,’ he said on Wednesday, reminds Kimberley, who adds: “That might make some think twice about buying more Canadian dollars when the currency is already so strong against its southern neighbour. Some might even choose to divest themselves of Canadian assets.”

A glance at the stats reveals how foreigner investors reduced their holdings of Canadian securities in June by a not-inconsiderable C$7.89 billion, after acquiring a record C$26.11 billion in May. This is yet another reason why the likes of Kimberley wonder if the love affair with Canadian paper could be waning a little? As he says: “Canadian dollar bulls would argue its strength is justified given that recent U.S. economic data, such as Tuesday's industrial production numbers, have been perkier.”

As Flaherty said on Wednesday, the on-going failure displayed by the U.S. authorities to address their budget deficit remains a significant threat to Canada. With progress on that front seemingly some way off yet, some might feel the loonie’s ascendency may have already fully priced in the upside bestowed upon it by the latest U.S. economic data.

In adding a touch extra political posturing in to the mix, Neal Kimberley – with many years of experience to draw upon – takes us back to the early 1990s and  how the muscle-flexing by Quebecois separatists was often a complicating factor for the Canadian dollar.

“It is an outlier but the Parti Quebecois, a separatist party seeking independence for Quebec has increased its lead before the province's election on September 4,” says Kimberley. “None of this is meant to be alarmist or to suggest the Canadian economy is in bad shape” he assures. “But it might not be in such good mettle as to justify the Canadian dollar's current strength against its U.S. neighbour. It might be more fairly valued against the greenback closer to C$1.01.”

Drew Hillier. Editor, ForexSpace.com