Shaun Osborne, Chief FX Strategist at TD Securities, on the Loonie

There is nothing at the moment that suggests it. The trend will not continue, but I think the Canadian Dollar is probably looking a little bit overdone at these levels. From a shorter term point of view, it is better for the market if the Canadian Dollar is a little bit closer to parity. The move we are seeing right now has been supported by slight widening out in interest rate differentials at the past few weeks. Interest rate spreads have moved up little bit in a Canadian Dollar's favour. Thus, we are getting back close to the highs that we saw back in May. The rise in the short-term rates that we have seen is not necessarily going to be sustained. It seems more likely that from the policy point of view the Bank of Canada is going to stay on-hold for quite some time. Certainly, in the short run interest rate spreads have been supportive, but I do not think it will last. The other risk for the markets around this time of the year is the seasonal threat to risk assets. The third quarter in particular is not usually good for risk assets. If we see another period of risk-off trading that would be supportive for the U.S. Dollar and negative for the Canadian Dollar. The Loonie is tightly correlated with risk assets for the moment, more so commodities or even short-term rates. That is the main issue at the moment. I think the market perhaps has become a little bit complacent as risk volatility is low again. Typically, when we have seen volatility back to these sort of levels; we have seen another phase of risk aversion so that would weaken the Canadian Dollar all those things being equal.

There is nothing at the moment that suggests the Loonie will continue to strengthen, but I do think it is looking quite rich at these levels. In the recent past anything close to parity or little beyond parity for the Canadian Dollar has been seen as an opportunity to sell Canadian Dollar and buy the U.S. Dollar. I suspect that probably remains the case for the moment.

It does not have much direct impact. Obviously, in an environment of slowing global growth, every time when we see increase in tensions within Europe that feeds into risk aversion and generally is not constructive for the Canadian Dollar. Canadian trade with Europe is still relatively small, hence the connection area is through the risk channel rather than trade channel directly. Europe's turmoil certainly does have an impact but it is more indirect impact on the Canadian Dollar via risk assets and the performance of risk assets more generally.