Canadian dollar at highest level in 30-years

The combination of strong exports from the commodity markets, good growth in the economy, a central bank that has managed inflation, and a fiscal house in good order has driven the Canadian dollar to the highest levels in 30-years. The continued strength is now causing analysts to talk about parity with the dollar. This is from the .65 level at the turn of the century.

The strong growth has been a concern with the central bank. The Bank of Canada has provided some hints that it may raise rates to quell inflation expectations at their next meeting in July. Short rates are currently at 4.25% which is lower than the US, but inflation in Canada has been tracking at a lower level. Canada growth has been tracking at 3.5% versus a growth rate of about 2.5% for the US.

Interestingly, the Bank of Canada provides a dashboard with the key policy indicators. It shows the inflation-control target, the operating guide, and the target for the overnight rate. Monetary policy could not be clearer.

Canada is a good example of where the exchange rate moves with the fundamentals and is not determined by the interest carry effects which seem to have dominated the behavior of many investors in 2007.