Loonie Might Pare its gains on Rate Review

By TraderVox.com

Tradervox (Dublin) – Analysts are warning that the loonie might not just pare its gains against the greenback , but it might also loose its best performing form it has gained for the last six months. Analysts are saying that the expected increase in the interest rate may be bad for the Canadian dollar as it would restrict consumer spending which is the main support for the loonie.

Despite the fact that investors favor currencies with high interest rates due to the high returns potential associated with them, the Canadian dollar might not enjoy this as the economy is underpinned by debt. Reports show that house hold borrowing rose to 152.9 percent of disposable income by the end of 2011. In 2007, the figure was at 135 percent, the new data indicates that the country has exceeded the US’s household borrowing which stands at 145 percent. According to Shahab Jalinoos who is a Senior Currency Strategist in Stamford Connecticut, the Canadian growth has been driven by domestic demand which is driven by consumer spending; consumer spending is directly linked to expanded leverage which would be hampered by an increase in interest rate.

According to some analysts and currency strategists, the Canadian currency will depreciate to parity against the US dollar as the Bank of Canada Governor indicated that a rate increase might be necessary for the economy. The BOC had last increased borrowing cost in 2010 when it raised it to 1 percent from 0.25 in a three step process which started in June and ended in September. In this period, the currency depreciated by 7.46 percent against nine of the most traded currencies in the world.

The Canadian economy has been propelled by domestic consumers especially the housing market, which account for 2/3 of the economy. The BOC has projected that the economy will grow by 2.4 percent during this year hence hedging economic growth on consumer spending.

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