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$10 dollar bills at par (CHRIS YOUNG/Chris Young/CP)
$10 dollar bills at par (CHRIS YOUNG/Chris Young/CP)

Canadian dollar finds a solid resting place at parity Add to ...

Canada's new-found status as the darling of international investors has finally pushed the dollar back to parity with its U.S. counterpart, where it's expected to hover for months or even years.

Observers point to Canada's economy, financial system and fiscal footing as standing out among the Group of Seven, attracting investors to Canadian assets such as stocks, bonds and the currency.

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The strong dollar, which closed Tuesday just shy of the $1-for-$1 level at 99.88 U.S. cents after trading earlier a shade above parity, adds pressure on retailers to cut prices to match U.S. levels, makes travel to the United States, Europe and other favourite destinations more affordable for Canadians, and even helps Canada's National Hockey League teams compete with U.S.-based rivals. At the same time, it causes headaches for Canada's export-heavy manufacturing industry, in particular companies without hedging strategies.

Regardless, investors see little reason to expect the loonie will drop more than a cent or two any time soon, and some analysts say the currency could keep rising through much of 2011.

"There are few places on Earth which are clean, sound and well-managed on the fiscal and monetary side, and Canada is definitely at the top," along with nations such Switzerland, Norway and Australia, said Sebastien Galy, New York-based senior currency strategist at the French investment bank BNP Paribas.

"If you want to hold assets over the long term, Canada is certainly part of the basket where you'd invest."

When Canada's currency hit parity with the greenback in the fall of 2007, for the first time in three decades, its surge was a function of soaring oil prices and a sliding U.S. dollar.

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Traders piled on to an anti-greenback bandwagon, pushing the Canadian dollar to $1.10 (U.S.) before it bounced around parity for several months, and then gradually fell back to about 80 cents as the global financial crisis drove down energy prices and investors returned to the perceived safety of the U.S. currency.

This time, oil prices at an 18-month high and the U.S. currency are still playing their roles, but the dollar is being driven as much by Canada's economy, as well as financial and fiscal "fundamentals," investors say.

The dollar in recent weeks has appreciated against currencies such as the euro, the British pound and the Japanese yen, all of whose economies are mired in problems - respectively, a complex debt crisis, potential political instability and deflation - that help Canada stand out all the more.

Expectations that the Bank of Canada will start raising rock-bottom interest rates in June or July, well before the U.S. Federal Reserve, are also boosting the dollar, as are signs the U.S. economy is improving.



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"Everything's aligned for the Canadian dollar to keep appreciating throughout this year and next," said Camilla Sutton, a currency strategist at Scotia Capital in Toronto. "As opposed to 2007, when the fuss was all about getting to parity, I think this time we actually are sustainably there."

Despite debate in Ottawa over how quickly Finance Minister Jim Flaherty can shrink Canada's biggest budget deficit, the books are in such good shape compared with most other governments that foreign investors are buying record amounts of Canadian bonds, another big vote of confidence.

Mr. Flaherty and Bank of Canada Governor Mark Carney appear willing to tolerate a strong dollar in part because it has been at historically high levels for enough stretches in recent years for industry to adapt.

"Companies are having to figure out how to compete on the basis of differentiating their products rather than just simply competing on the basis of cost alone," said Jay Myers, president and chief executive officer of the Canadian Manufacturers & Exporters.

Still, even as they experiment with hedging strategies and seek out new markets, companies are taking a hit, Mr. Myers said. By his group's estimate, each 1-cent rise in the currency costs Canadian exporters about $1-billion to $1.2-billion over the course of a year.



An early morning slide

When the Canadian dollar first broke through parity on Sept. 20, 2007, at 10:58 a.m. ET, trading floors erupted across the country. It was the first time in 31 years that the currency achieved equal status with its U.S. counterpart and a source of much national pride.

Yesterday's move to par, at 6:48 a.m., was a little more muted. "It was less exciting because just a few of us were around," said Matthew Strauss, senior currency strategist at Royal Bank of Canada.

But the time of day wasn't the only big difference between then and now. Here are other distinctions between parity in 2007, compared with parity today.

THE PACE

The final runup was dizzying in 2007, making it more difficult for companies to adjust. That year began with the currency at 85 cents (U.S.), with the dollar jumping from 96 cents to parity in the mere space of a few weeks in September, a move traders characterize as "violent." This time round, the currency has traded at 92 cents or above for the past seven months.

THE FACTORS

In 2007, the focus was squarely on the U.S. dollar, which had fallen out of favour and reached a record low against the euro. Speculation and technical factors helped pushed the loonie to parity. This time, investors in Canada and around the world say fundamental factors are driving the loonie, among them rising commodity prices, heightened interest-rate-hike expectations, a relatively healthy fiscal outlook and growing signs of an economic rebound.

THE PREPAREDNESS

In 2007, the pace of increase and level of the currency caught many exporters off guard. Many spoke of the harsh impact the currency was having on business, and some wanted the federal government or Bank of Canada to intervene. Companies appear better prepared this time, with a growing number hedging their business to protect themselves from volatility.

THE SUSTAINABILITY

Parity in 2007 didn't stick. The currency hit an intraday high of $1.10 that November before sinking to 98 cents the following month. It averaged 94 cents in 2008. Strategists believe the currency will now stick around the parity mark for months to come, given that the pace of increase was more orderly and rational, with much of the move driven by fundamental factors.

Tavia Grant

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