Canadian Dollar Update

February has been kind to the Canadian dollar so far. It is the second strongest major currency, gaining about 2.5% against the US dollar, and lagging a little behind the top performer the Swedish krona.

The relative healthy Canadian banking system and relatively stable debt to GDP ratios, which became more salient in the face of pressure in Europe, coupled with commodity plays were among the main drivers of C$ appreciation. We also note that in a strong US dollar environment, the C$ often tends to out perform the many of the other majors. Often it seems as if Canada, a small country by G7 standards, often leads by example. We have noted how the Bank of Canada has diversified its reserves so that although the US is by far and away the largest buyer of Canadian exports, only around half of Canada's reserves are denominated in dollar assets.

There is a debate among central bankers and their critics about the function of preventing asset bubbles in asset markets. Yesterday, Canada's Finance Minister Flaherty took some steps aided at preventing a bubble in Canada's residential real estate market. The word preventing is used advisably here as some observers are already claiming a bubble exists. 

In any event, Flaherty announced three measures effective April 19th. First, buyers must meet the more rigorous standards required of some taking on a 5-year fixed rate mortgage, even if its another type of mortgage product. Second, he tightened the requirements needed to refinance mortgages. Third, in a purchase of a house one does not plan on living in, Flaherty announced that a 20% down payment will be required. It is thought that this too will dampen speculation in the housing market. This is the second time iFlaherty has tweaked the mortgage market to try to slow things down a bit. The extent of government insurance was limited slightly in 2006. 

The US dollar has found support near CAD1.04. Initial resistance is seen in the CAD1.0480-CAD1.0500. If this area is taken out, the risk extends toward CAD1.06.