Rising commodity prices and expectations that Canada will lead economic growth among Group of Seven countries this year are boosting the allure of Canada's assets, sending global investors rushing to buy the Canadian dollar.
"There has been renewed interest in commodity currencies generally and the Canadian dollar is benefiting," said Ian Stannard, foreign-exchange strategist at BNP Paribas SA in London. "We see some further potential for the Canadian dollar to appreciate."
The loonie strengthened to 96.25 cents (U.S.), and earlier touched 96.74 cents, its highest level since Oct. 19. Crude oil futures neared a 14-month high Tuesday as cold weather and signs of a global recovery boosted the outlook for energy demand. Gold and aluminum prices also advanced.
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"The Canadian dollar has now become the latest fashion frenzy," David Watt, senior currency strategist at RBC Dominion Securities, said in a morning note, adding that global investors have been boosting their long positions in the currency recently.
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The Canadian government is hoping to benefit from that positive sentiment. The country's Finance Department said Tuesday it will issue 10-year euro-denominated bonds in the "near future." The new bonds, the first in more than a decade to be floated in euros, will be used to bolster its foreign exchange reserves.
The timing is no accident, economists said. "Canada's standing in the world is currently very high, which should mean relatively easy access to ample foreign financing," said Eric Lascelles, chief economics and rates strategist at TD Securities. "This is especially true in Europe, where various European states have recently fallen upon hard times, providing an especially sharp contrast with Canada."
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Most economists expect Canada will lead G-7 economies this year, with estimates ranging from about 2 per cent to 3 per cent growth.
The Canadian currency, meantime, could trade at par with the U.S. dollar on a sustainable basis by the middle of this year, said Bank of Nova Scotia strategists.
"Relative fundamentals, with reasonable growth prospects, a more controlled deficit and a large commodity base, are all supportive of the Canadian dollar," they said in a note.
The Canadian dollar rose 15.8 per cent against the greenback last year. It also strengthened against the yen, euro and Mexican peso in 2009.
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The appreciating currency, which poses challenges for exporters, diminishes the odds of a Bank of Canada interest rate hike any time soon.
"The Canadian dollar's rise means the Bank of Canada needs a really, really, really strong case for tightening monetary conditions in the spring," said Carl Weinberg, Valhalla, New York-based chief economist of High Frequency Economics. "We cannot see it happening."