Future Gains by the Canadian Dollar Uncertain

The Canadian dollar reached a 30 year high at 94.79 U.S. cents. Even though it has fallen since, an increase is still possible after today’s U.S. government report showed a decrease in new home sales 930,000 in April to 915,000 in May. New homes were sold at a median price of $236,100, down .9 percent from a year ago. Due to this decrease there has been reason to believe that the U.S. Federal Reserve will begin cutting interest rates causing investors to be prone to selling the U.S. dollar allowing the Canadian dollar to gain.

Further Canadian dollar gains are very possible, but it is important to be aware of the other factors affecting currency fluctuations. As Canada and the U.S. have a close trade relationship, a slowing U.S. economy could spill over into Canada resulting in a Canadian dollar could losing ground to major foreign currencies such as the euro and the pound.

Additional factors affecting the value of the Canadian dollar are crude oil prices and Central Bank lending rates. Crude oil prices have been declining and could hurt gains made from the U.S. housing report. Due to the fact that oil makes up half of Canada’s commodities exports, decreasing oil prices will hurt the Canadian economy. This in turn will make its currency less valuable. Lastly, there is still uncertainty as to whether the Canadian central bank will raise lending rates for its currency. On May 29^th this year, the central bank had announced a possible increase in rates because inflation was not at the target level. However, this change has not happened yet as the lending rate has continued to be at 4.25%, the same since May 2006. The Canadian dollar will see a short term gain with news of slowing new U.S. home sales, but it remains to be seen whether it can maintain this gain in the long term.