The Canadian dollar vaulted over 90 cents (U.S.) for the first time in more than 28 years Tuesday, with some investors predicting parity may be around the corner.
The loonie rose as high as 90.41 cents against the U.S. dollar and is trading at its highest level since Jan. 24, 1978 on the back of rising gold and energy prices, souring sentiment against the U.S. dollar and robust global investment demand. It closed at 90.38 cents.
“Forecasts of parity are multiplying faster than bunny rabbits in May,” wrote Douglas Porter, deputy chief economist for BMO Nesbitt Burns Inc., in a morning note.
In the past month, the loonie has posted the second-largest monthly increase in 55 years, according to a report yesterday by National Bank Financial.
The loonie held its gains Tuesday as the federal budget revealed tax cuts and an expected budget surplus this year.
The Canadian dollar, which has soared 13.1 per cent in the past year, closed yesterday at 89.93 cents.
The trajectory presents a quandary for the Bank of Canada, which has signalled that Canadian interest rates are header higher to tame a predicted pick-up in inflation.
A strong currency is causing more pain for Canadian manufacturers, which have shed almost 200,000 jobs since the end of 2002 and are directly responsible for more than a fifth of Canada's economic activity. The Canadian Manufacturers & Exporters predicted Tuesday that 100,000 more jobs would vanish this year.
“The manufacturing sector could get hurt,” said Rohit Sehgal, chief investment strategist for Dynamic Mutual Funds Ltd., in an interview. “Alberta and the western provinces will do very well, but Ontario may get hurt.”
On the other hand, a strong Canadian dollar benefits retailers, whose import prices are dropping, as well as Canadian travellers vacationing outside the country. It also makes buying new U.S. machinery and equipment cheaper, a move likely to boost Canada's productivity.
Most of the Canadian currency's gains are against the U.S. dollar rather than other currencies, National Bank's economists said in a note Monday.
“In our opinion, this suggests that the next leg of Canadian dollar appreciation against the greenback is likely to be driven more by U.S. dollar realignment than by commodity prices and the price of oil,” said Clément Gignac and Stéfane Marion.
Many analysts are expecting a weakening of the U.S. dollar in the months to come, partly amid concern about its giant current account deficit.
Mr. Gignac and Mr. Marion now expect the loonie to trade at an average 90 cents this year, up from their previous forecast of 86 cents. Next year, they expect an average of 97 cents, “with parity by fall 2007.”
With reporting by Angela Barnes.
4
