Expectations of rising interest rates, a revived economy and robust investor demand are prompting some strategists to suggest parity is around the corner.
The Canadian currency CAD/USD-I , currently trading near a two-month high, will pass parity with its U.S. counterpart by the summer, CIBC World Markets said in a report Wednesday. Bank of Nova Scotia sees the loonie at “parity and beyond.”
Several factors are boosting the allure of the currency. Strong economic data solidified expectations that interest rates will start to rise this summer, making Canadian assets more attractive to investors. Global demand is increasing appetite for Canadian commodities like oil and fertilizers. Foreign acquisitions of Canadian companies could heat up, spurring demand for dollars to buy companies. And fears of sovereign defaults could drive investors into the comparative stability in Canada, CIBC said.
Recently, rates are a key driver, the bank said.
“We've already seen the Canadian dollar gain several cents in recent weeks as the market began to firm up expectations of an interest rate hike in July” by the Bank of Canada, said Avery Shenfeld, the bank's chief economist. “If, as we expect, the Bank [of Canada] is out in front of the U.S. Federal Reserve by a couple of quarters, a higher Canadian dollar will help tighten monetary conditions.”
He sees the Canadian dollar hitting $1.02 against the greenback by September, before dropping to 97 cents by the end of the year.
He's not alone. Scotiabank economists said Tuesday they too see parity, with even greater strength against other currencies such as the euro. “The [Canadian] economy will not only survive in this climate as it has before, it will generally thrive,” they said.
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Understanding the Canadian dollar: A four-part series
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The loonie traded at 97.48 cents (U.S.) Wednesday, little changed from Tuesday's 97.43 cents.
The U.S. dollar has fallen 2.5 per cent again the Canadian dollar this year. The Swiss franc has fallen 5.7 per cent and the euro is down 7.3 per cent against the loonie. The sharpest drop has been the British pound, which has plunged 9.8 per cent against the Canadian dollar.
The big banks aren't the only ones predicting parity.
“A sound economy, strong growth supported by the commodity story and a stable banking system all point to a stronger Canadian dollar and parity,” said Rahim Madhavji, president of Toronto-based president Knightsbridge Foreign Exchange.
Risks for the currency remain though. China releases its inflation data on Thursday and that could tilt the markets, he said. “Increasing inflation in China will mean that the government will restrict borrowing, dampening commodity markets and the Canadian dollar.”
