The Canadian dollar could get another boost from the Bank of Canada's scheduled interest rate announcement on Tuesday.
The central bank is expected to leave its key interest rate unchanged at 0.25 per cent, where it has been for a year now as the country recovers from recession.
What traders will be looking for is a key change in wording of part of the bank's announcement that could provide a hint of when rates will increase.
The bank has said for months that "conditional on the current outlook for inflation, the target overnight rate can be expected to remain at its current level until the end of the second quarter of 2010 in order to achieve the inflation target."
There has been speculation recently that the bank could move even sooner to raise interest rates since the economy has been doing far better than expected, while core inflation has been on the rise.
Investors will be watching for any change in that wording, looking for a hint that the Bank of Canada could raise rates as early as its next announcement on June 1.
"Given the steam in the Canadian dollar, I think if the Bank of Canada becomes more hawkish and raises the risk or heightens the risk of an early move, say in June, the dollar could rocket higher and that to us would raise the downside risk to the economy," said BMO Capital Markets senior economist Sal Guatieri.
"I mean, it's moved fairly steadily towards parity in recent months. But if it shot up to its modern day high, about 1.10 cents U.S., over the next month or so then to us that would impose some severe damage on the economy. Exporters and manufacturers don't have time to adjust to such a sharp appreciation."
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Mr. Guatieri said he doesn't think the bank will change the phrase next week, adding it is mindful that if its raises the prospect of an earlier or more aggressive tightening move, the Canadian dollar "could just get away."
The loonie last week closed above parity with the U.S. dollar for the first time since May, 2008.
The rise in the Canadian dollar over the last year shouldn't impact companies too badly, said Norman Raschkowan, chief investment officer for Mackenzie Financial Corp., observing that companies were unprepared when the loonie hit parity with the greenback in 2007 for the first since 1976.
"I think companies probably were a little lax the last time, they were sort of caught off guard. And I suspect that this time around, they have put in place more currency hedges, they have reduced their vulnerability to currency," he said.
"(That) doesn't mean they have eliminated it but that it's going to be less disruptive."