The Canadian Dollar: Loonie Jumps On Euro Zone Package

The Canadian dollar seems to have gone loonie quite literally on announcement of the Euro zone bailout package. The Loonie climbed 2% on the announcement of the loan package of about 1 trillion US dollars to contain the sovereign debt crisis in Europe. The Euro zone salvage plan has been put together by European Union, European Central Bank and International Monetary Fund.

In reality, the Canadian dollar gained back the ground it had lost with the onset of the Euro zone sovereign debt crisis. The onset of the Euro zone debt crisis had let to investors shedding riskier investments in favor of US dollar based secure investments, which had led the US dollar to move up under the popular phenomenon of risk aversion. The current jump in the Loonie is more of gaining back of the lost ground, with risk aversion taking a back seat. This movement of the Loonie also suggests that investors do not consider it a safe haven currency and the US dollar continues to be the primary risk aversion currency.

The Euro zone bailout package on the other hand does not bode well for the Euro, which recently had gained limelight, with the US budget account deficit skyrocketing. However, the Euro zone debt crisis is making things difficult for the Euro to be accepted as an alternative to the US dollar. The Euro battering is on account of the Greek debt crisis, with its budget deficit up and nearing 14% of its GDP. This has led to a jump in the premium on Greek government bonds and this risk is now being factored into the Euro's exchange rate vis-à-vis the US dollar. The Greek government will have to find ways to bring its fiscal deficit down to 3% of GDP to harmonize it with the Euro standards, which can lead to confidence being restored in the Euro.

What makes matters worse for the Euro at this point of time is that productivity in the Euro zone has fallen, while the US has made striking gains in productivity due to the pressures posed by recession. While the gains for the US have been around 8% since the recession in 2007, Germany has lost 9% on this count, with other nations in the Euro zone likely to have been worse hit. Falling productivity implies an increase in costs, which makes the nation's goods and services more expensive and exerts a downward pressure on its currency. Thus, the productivity factor is also likely to keep the Euro in the negative zone. UK's Pound is also under pressure due to fiscal issues and economic conditions plaguing the nation. While the new coalition government has pledged to cut the deficit via a decrease in expenditures and an increase in taxes, the markets took the announcement with a pinch of salt and the Pound lost grounds to the US dollar. While, the analysis above hints at a gloomy scenario in the Euro zone, in reality the area was hit by the recession later than the US. This suggests that the impact of the recession may take a bit longer to wear off in the Euro zone than it has for the US and in the interim the Euro would continue to face some weakness.

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