Canada Dollar Too Strong, JPMorgan, Lehman, Morgan Stanley Say

The Canadian dollar's climb to a record high this month has pushed it about 10 percent above its ``fair value,'' according to currency analysts at JPMorgan Chase & Co., Lehman Brothers Holdings Inc. and Morgan Stanley.

The Canadian currency rose to an all-time high of $1.0747 yesterday as investors bet demand for the nation's commodity exports will keep the economy expanding. Its 25 percent gain this year is the most among the 16 most-actively traded currencies.

``This trend is extremely overextended,'' Jim McCormick, London-based head of currency strategy at Lehman, said in an interview on Nov. 2. ``If you look at terms of trade, performance of interest-rate spreads, and risk appetite, nothing justifies this trend. Fair value should be 10 percent lower.''

Canada's dollar traded at $1.0708 at 6:46 a.m. in Tokyo, after reaching the highest yesterday since the government first allowed the currency to float in 1950. One U.S. dollar buys 93.39 Canadian cents. The Canadian dollar reached parity with the U.S. dollar on Sept. 20 for the first time since 1976.

Canada, the world's eighth-biggest economy, has benefited from rising demand for copper, gold, wheat and oil from the U.S. and emerging economies such as India and China. The country is the world's largest producer of uranium, the second-biggest exporter of natural gas, and sits on the largest pool of oil reserves outside the Middle East. Canada is also the world's second-largest exporter of wheat.

`Overvalued' Currency

The currency will decline to C$1.05 per U.S. dollar by year- end, and to C$1.07 by the end of March as the Bank of Canada cuts borrowing costs next quarter to help the economy weather the U.S. slowdown, Morgan Stanley predicts. Canada sends more than 75 percent of its exports to the U.S.

``Most models would say the Canadian dollar is overvalued,'' Sophia Drossos, a currency strategist at the firm in New York and a former Federal Reserve economist, said in an interview on Nov. 5. ``There are a lot of links between the U.S. and Canada, and there are going to be some knock-on effects on Canada which we're not seeing yet.''

The Bank of Canada will cut its benchmark rate a quarter- percentage point to 4.25 percent, probably next quarter, Morgan Stanley forecasts. The Bank of Canada has left its key rate unchanged since lifting it to the current level in July.

With the Fed's Oct. 31 move to cut its target rate a quarter-percentage to 4.5 percent, the two nations' overnight rates are even for the first time since 2005. The Fed lowered its benchmark in September for the first time since 2003.

Futures Bets

At 4.29 percent, Canada's 10-year government bond is about 5 basis points, or 0.05 percentage point, below the U.S. 10-year Treasury.

Ted Carmichael, chief Canadian economist at J.P. Morgan Securities in Toronto, wrote in a note published Nov. 1 that the currency's fair value is C$1.05, when taking into account the price of the nation's commodity exports. Carmichael and Rebecca Patterson, a New York-based currency strategist at JPMorgan, didn't return calls.

Futures show hedge funds and other large speculators have reduced bets the Canadian dollar will advance. Net long bets have declined three straight weeks, to 68,831 contracts in the week to Oct. 30, from a record 83,001 contracts reached last month on the Chicago Mercantile Exchange, according to the Washington-based Commodity Futures Trading Commission. A long bet is a wager a currency will rise.

99 Canadian Cents

Canada's currency will decline to 99 Canadian cents per U.S. dollar by year-end, according to the median forecast of 39 analysts surveyed by Bloomberg.

Bank of Canada Governor David Dodge said on Oct. 22 that the currency's climb has been ``abnormally quick,'' and it will slow the Canadian economy in 2008.

``People are trading this currency as a crude oil proxy,'' said Drossos. ``It's not only crude oil that drives the Canadian economy. There is too much focus on the energy complex. There just seems to be a lot of speculative interest in the Canadian dollar.''

Crude oil for December delivery fell 2 percent yesterday to settle at $93.98 barrel at 2:51 p.m. on the New York Mercantile Exchange. Futures climbed to $96.24 on Nov. 1, the highest intraday price since trading began in 1983.