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Dollar appears comfortable at parity Add to ...

Is this the year the Canadian dollar finds a new comfort level at parity?

The loonie has teased Canadians for much of 2010 with the prospect of equality with the U.S. greenback, hitting the psychological barrier in April and again in each of the last three months.

But like a nervous teenager at a prom, it hasn't felt comfortable in the company of its more worldly American cousin - falling back each time.

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Yet it was back on the dance floor as the year closed out Friday, ending 2010 just above par at 100.54 cents (U.S.). And many analysts believe the loonie is more than likely to stay there going forward.

"This year will be the year we sustainably move through parity," predicts Camilla Sutton, Scotiabank's head currency strategist.

"Canada has a backdrop that is favourable in comparison with the U.S. We have a stronger sovereign position, our economy has recovered better, we have rising commodity prices, as well as quantitative easing in the U.S., which is putting downward pressure on the U.S. dollar."

The fly in the ointment, which kept the loonie from performing at a more consistent level in 2010, remains what economists call the risk horizon.

Independent economist Dale Orr says despite the well-documented problems in the U.S., the greenback remains the currency of choice whenever anything goes wrong in the world. And with no assurances that the Europe Union will deal successfully with high sovereign debt at some of its member countries, the risk horizon remains as cloudy next year as it was in 2010.

The impacts on the loonie in 2010 were profound. After rising from the 93-cent level at the start of the year to parity in April, European woes surfaced, particularly in Greece, driving Canada's currency down to about 92 cents in May.

And after the EU and the International Monetary Fund staunched the bleeding, the Irish debt crisis erupted to send the loonie tumbling again in the latter part of the year.

CIBC analyst Emanuella Enenajor believes the loonie is in for at least one more swoon before it re-establishes itself on a par with the U.S. dollar in late 2011.

She says re-financing issues in Europe during the first and second quarter of 2011 could see the loonie fall back as much as six cents to 94 cents, before closing the year out near parity again.

But the important measure of the loonie's strength, says Mr. Orr, is that it keeps coming back after each crisis subsides.

"The fundamentals should have us around par, and we've only departed from there when there were jitters," he notes.

"There's going to be days when it's going to be 95 cents and days when it is $1.05, but my guess is it will average just above par next year and in 2012."

Mr. Orr says it won't come as a surprise if the dollar again hits $1.10 US briefly in 2011, just as it did in November of 2007.

The jitters have exerted an influence on commodities traded in U.S. dollars, particularly gold - a flight from risk metal that has seen its value appreciate 29 per cent in 2010, following a 24 per cent gain in 2009.

For the loonie to do well, say analysts, the global recovery needs to lay down deep roots, which will increase the demand for commodities that Canada has in abundance to sell the world, particularly oil.

Ms. Enenajor calls the loonie a proxy for the global economic outlook, which is why as fears of a second double dip recession in the U.S. receded in the past few months, the Canadian dollar has strengthened.

Not everyone agrees that the loonie will continue to prosper, however.

Capital Economics chief economist David Madani agrees that the loonie is tied to commodity prices, but says he believes they have overshot relative to the strength of the global economy.

If that is the case, a correction in commodities will take away a bit of the wind beneath the loonie's wings, which Mr. Madani says will be a relief for the Canadian economy.

A strong currency makes Canadian goods less competitive in world markets, and imports cheaper for Canadians, a recipe for slow growth and large trade deficits.

But not all the impacts of a strong currency are negative. Orr points out that companies that import material and sell mostly in Canada are big winners since they receive a discount on their inputs and a bonus on sales.

This equally applies to individual Canadians, he adds, who benefit from the increased purchasing power of the loonie whenever they travel or buy foreign goods, including vacation homes in the U.S. south.



The Canadian Press

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