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Strength of Canada dollar link to oil price tested

Date: Thursday, June 12, 2008
Author: Lynne Oliver, Canada.com

TORONTO (Reuters) - Is the Canadian dollar actually a petrodollar or is its link to record-high oil prices tenuous and temporary?

No clear answer emerged at investment conference in Toronto on Wednesday, but both sides of the argument were broached vehemently.

Although sometimes called a petrocurrency -- due to Canada's hefty energy exports and last year's close correlation with the oil price -- the Canadian dollar has not spiked in recent weeks even though crude oil ran up to a record of nearly $140 a barrel.

U.S. crude prices rose $5 to $136.38 a barrel on Wednesday, while the Canadian dollar, at 98.4 U.S. cents, is well off the $1.10 level it hit in November 2007, its strongest showing since the 19th century.

Dennis Gartman, the Virginia-based publisher of an investment newsletter, the Gartman Letter, told the conference that he's starting to get bullish on the Canadian dollar.

But Gartman also said he expects crude oil prices to fall to around $85 to $90 a barrel in a year, prompting John Embry, chief investment strategist at Sprott Asset Management in Toronto, to call Gartman's positions contradictory.

"In one breath, you just said the oil price is going to get crushed, and if the oil price gets crushed the Canadian dollar is going with it," Embry said.

But Gartman pointed out that Canada has other commodities that are in demand -- wheat, corn, canola, tungsten and copper, for instance.

"We focus so much on crude oil," he said. "You've got all kinds of crap to sell, it's not just crude oil."

Embry insisted that the Canadian and U.S. economies are interlocked, so the Canadian dollar cannot move up sharply from its current level.

They were part of a panel at the conference that occasionally agreed and often disagreed on oil, inflation, the outlook for the U.S. economy, and the credit crisis.

A Canadian hedge fund manager said earlier this week that the Canadian dollar looked set to fall since it had not been able to muster a rally despite sky-high oil prices.

Colin Stewart, a portfolio manager at JC Clark Ltd in Toronto, told an audience on Tuesday that his firm expects the Canadian dollar to weaken against the U.S. dollar this year.

"We think particularly near term, it's looking very very vulnerable," Stewart said.

"If you have oil prices at $135, $140 a barrel and the Canadian dollar cannot get any traction against the U.S. or euro, I hate to think what's going to happen when the oil prices fall or commodity prices fall," he said.

Stewart said he thinks Canadian mutual fund and hedge fund managers will increasingly hedge their currency exposures because many of them lost money on U.S. stocks over the last few years, when the U.S. dollar began to weaken.

A Morningstar Canada survey of 23 fund managers, released on Wednesday, found that 86 percent of them expect the Canadian dollar to remain between 95 U.S. cents and $1.05 in the next year.

In a Reuters poll of foreign exchange strategists and economists, updated June 4, the median expectation was for the Canadian dollar to fall to 96.15 U.S. cents within six months, and to 93.63 U.S. cents within 12 months.

Recent data showed the Canadian economy shrank unexpectedly in the first quarter, but the Bank of Canada surprised the market on Tuesday by leaving interest rates unchanged, citing slightly higher inflationary risks due to global growth and high commodity prices.

($1=$1.02 Canadian)

(Reporting by Lynne Olver; Editing by Peter Galloway)