As risk returns to global markets since March, the Canadian dollar along with a host of other foreign currencies, including commodity currencies, has surged versus the American dollar. In May, the Canadian dollar logged its strongest month versus the U.S. dollar in more than a decade gaining 8.5%.

Over the same period, the loonie has also proved to be highly correlated to crude oil; commodities posted their best month in May since July 1974 with oil prices surging 30%.

To be sure, the Canadian dollar is overbought at these levels and will probably correct lower along with commodities at some stage this summer as profit-taking finally emerges following big gains in stocks, speculative and investment-grade debt and commodities since March 9.

But Canada does have its share of problems in 2009.

Red ink has started to emerge following years of budget surpluses while in some provinces, namely Ontario, have amassed big deficits amid a manufacturing recession and General Motors’ recent bailout. Ontario’s budget deficit has already surged 31% this year compared to 12 months earlier.

Canada is now poised to record its first budget deficit in more than twelve years.

According to the Department of Finance the estimated deficit for 2008-2009 stands at C$2.25 billion dollars or double January’s projected C$1.1 billion dollar shortfall.

The global credit crisis has hit Canada’s manufacturing belt in Ontario and Quebec particularly hard with unemployment rates above the 8% national average through April.

Government revenues are also on the slide.

Tax receipts in March dove 20.8% in Canada led by a stunning 46.8% plunge in corporate tax revenue. In the first quarter Canada’s gross domestic product, or GDP, contracted 5.4%.

Canadian trade is also taking it on the chin this year. The country’s current-account deficit for the first three months of 2009 was a negative C$9.1 billion dollars, up from a revised C$7.8 billion dollars in the fourth quarter. The first quarter trade deficit was the largest since Statistics Canada first began compiling records back in 1946.

The federal government now projects a C$50 billion dollar deficit in 2009. Though that’s certainly nothing to sneeze at it certainly pales to the gargantuan C$1.9 trillion dollars estimated by the U.S. Congressional Budget Office for fiscal 2009. Other countries, mainly in the G-7, are also on course to record huge deficits as a result of monster-sized fiscal spending; the United Kingdom, in particular, will probably borrow more than the entire size of the British economy over the next 12 months.

And yet despite all the challenges facing Canada amid the worst destruction in credit since the 1930s, the country is the best of the G-7 bunch.

In both absolute and relative terms, Canada looks much better than other major economies with a manageable debt level and a strong inventory of raw materials should the global economy recover.

Versus the U.S. dollar, the loonie is a far better store of value as the former amasses record budget deficits for the next several years to pay for seemingly never-ending bailouts and, eventually, a second round of stimulus spending.

Over the next several months or sooner, the loonie is also likely to fetch more than the U.S. dollar or break par value once again.

For American investors, gold, the Canadian dollar and the Norwegian kroner are among the best currency plays for the next three years and beyond.

The United States will have to keep interest low in the absence of organic domestic consumption, a long-term housing bust and the implications of the governments’ socioeconomic bailout of roughly 35% of U.S. GDP since 2008 – mainly in banking. Credit will be slow to return to pre-2007 levels while demand for debt accumulation remains virtually non-existent as consumers grow frugal for the first time since the 1970s.

Canadians, however, should accumulate gold with the loonie at these high levels. Gold prices have been declining versus the Canadian dollar since March but that trend is only temporary; since 2005 gold prices have appreciated versus all currencies, including the loonie. Apart from gold, only the Norwegian kroner offers a better balance sheet than Canada with tremendous oil surpluses and the world’s largest national state pension fund.

Canada has been fortunate. The country has not suffered a bank bailout, maintains a relatively strong balance sheet compared to its biggest trading partner and has mountains of commodity wealth to feed the world as inflation finally rears its ugly head once central banks finally defeat deflation and the ongoing destruction of credit.