Canadian dollar rise unlikely to gather more steam

TORONTO, Oct 30 - The whopping rebound by the Canadian dollar from a multi-year low this week should not be misinterpreted as the start of another trek back to parity with the greenback, given the slew of headwinds it faces.

With persistent volatility in financial markets, many experts are shying away from nailing down a near-term forecast for the Canadian dollar, but it does appear that most expect it will remain under pressure and, at best, not stray much higher than it is today.

"I don't think we've seen the bottom, but I don't think we are going to go dramatically lower than where we are," said David Watt, senior currency strategist at RBC Capital Markets.

Just this week the Canadian currency rallied from a four-year low below 77 U.S. cents on Tuesday to a 10-day high on Thursday above 84 U.S. cents, which marks a bigger range than it recorded during the first six months of 2008.

The currency's recent charge has come as the U.S. dollar encountered an intense bout of selling since improved market sentiment left little interest for panic buying of U.S. bonds and greenbacks.

Also playing a role in the Canadian dollar's ascent are improved prices for oil and gold, which often influence the currency's direction since Canada is a key exporter of both.

The rapid pace of the Canadian dollar's 17.5 percent charge last year, which included its first stint above the greenback in over 30 years, followed by a 13 percent slide over the past month are prime examples of the market volatility.

Moves of that size in a market environment unlike any other make currency predictions extremely difficult, and it is that very uncertainty that is likely to keep a lid on the Canadian dollar.

"The volatility is probably going to remain, the credit crunch is not really improving, equities are still vulnerable and I don't think there is a whole lot of confidence really in the market that we are through this," said Shaun Osborne, chief currency strategist at TD Securities.

"So I don't think anyone can rule out the Canadian dollar falling further, or the U.S. dollar rallying more, into the end of the year."

Osborne also contends there is not much sustainability behind the currency's latest rally and expects it will likely continue to bounce around in a range of 74 to 87 U.S. cents.

Central banks around the globe have slashed interest rates in bids to revive sagging economies, but that has not produced much in the way of convincing evidence that those efforts have had a lasting impact on the psyche of investors.

Economic data continues to point to contractions in areas such as the U.S. and Europe and a global recession remains at the top of the market's list of worries.

So if the global economy weakens further and slips into a recession, slashing demand for commodities and manufactured goods, it would most likely spell trouble for the Canadian dollar since the economy relies heavily on exports.

Still, with all the reasons supporting the idea of a lower currency, there are some in the market that feel its slide was a little much.

BMO Capital Markets Senior Economist Sal Guatieri said the recent decline was overdone and it is more fairly valued around 85 U.S. cents because Canada's economy is better suited to withstand a global slowdown than the United States.

"I wouldn't say we're all fine, but I think we are in better shape than the U.S. to withstand the storm and on that basis we should see the Canadian dollar stabilize and firm up a little bit," said Guatieri.

"We have seen some calm returning to financial markets, equity markets are pointing higher and that should continue to reverse some of the safe-haven flows into the greenback."