Housing, resource demand may boost Canada dollar

LONDON: The Canadian dollar might gain in coming weeks, supported by Canada's resource strength and apparent central bank concern at the pace of asset price rises and consumer debt growth.

As Finance Minister Jim Flaherty reminded Canadians on Monday, interest rates "have nowhere to go but up" from the central bank's current benchmark rate of 1.0 percent.

For the Canadian dollar, the April 29 high of C$0.9506 against the US dollar might be an initial target, with the C$0.9200 level, last seen in November 2007, beyond that.

Canada's booming housing market is undoubtedly on the radar of Bank of Canada (BoC) Governor Mark Carney.

Carney warned on June 15 that Canadians are now as deeply personally indebted as their US neighbours, and that the proportion of households that are vulnerable to an adverse economic shock is at a nine-year high.

Canadian housing prices are now 13 percent above their pre-crisis high.

While Carney made no clear signal the BoC was prepared to raise interest rates soon to address housing price rises, investors might logically infer that tighter monetary policy is on the horizon.

The risk that tighter monetary policy prompts an even stronger Canadian dollar might give the BoC pause for thought, but the reality is that only higher benchmark rates are likely to deter consumers from taking on more debt.

The central bank will have noted that Canadian households dug themselves further into debt in the first quarter, Statistics Canada data showed on Monday.

The ratio of household credit market debt, which includes mortgages, consumer credit and loans, to disposable income rose to 147.3 percent in the first quarter from a revised 146.2 percent in the previous three months.

Aside from these domestic economic factors that could lend themselves to a stronger Canadian dollar, the country's resource strengths also have positive implications for the currency.

FOOD AND ENERGY

The international charity Oxfam has said food prices could double in the next 20 years as the world struggles to raise output to meet demand.

A report issued on Friday by the United Nations' Food and Agriculture Organisation (FAO) and the Organisation for Economic Co-Operation and Development (OECD) tells a similar story.

World commodity prices will keep up their relentless push higher this decade compared with previous years, supported by burgeoning demand for food and fuel as well as knock-on effects from energy costs, the FAO and OECD said on Friday.

With the FAO/OECD report expecting an "average of up to 20 percent" increase in global cereals prices in real terms over the 2011-20 period compared to the last decade. , a major grain exporter like Canada stands to benefit.

The Canadian dollar would be likely to gain accordingly.

The currency's allure can also only be enhanced by Canada's ability to exploit its reserves of shale oil and gas, as world demand for energy strains global supply capacity.

On Thursday, the International Energy Agency (IEA), the Paris-based adviser to 28 consumer countries, raised its five-year global oil demand forecast by an average of 700,000 barrels per day (bpd) compared with the previous medium-term report issued in December.

Meanwhile supply is constrained, with the IEA not expecting Libyan output to return to pre-war levels until 2014

Yet, in its "Medium Term Oil and Gas Markets 2011", the IEA projects growth in oil supply capacity through 2016. Canada is cited as an important non-OPEC contributor. Whether based on the interest rate outlook or likely demand for natural resources, the Canadian dollar may be seen as offering value.

Copyright Reuters, 2011