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LoonieLarry MacDougal

Is that it for the rally in the Canadian dollar? The loonie has risen a total of 27 per cent since March 9, when North American stock market indexes bottomed out and investors began to embrace riskier assets and currencies again. Over this same period, the price of crude oil has leapt 90 per cent and the Reuters/Jefferies CRB index of 19 commodities has risen 29 per cent.

Over the past 10 trading days, though, the dollar has had a tough time breaking above 98 cents (U.S.), and fell slightly below that level on Thursday.

Now, Matthew Strauss, senior fixed income and currency strategist at RBC Dominion Securities, believes that gains could be hard to come by. After a 12 month rally by the Canadian dollar, it could fall into a trading range during the second half of this year and into 2011.

"As we approach parity, caution is warranted - instead of popping champagne corks celebrating past, current and future CAD strength, CAD bulls should remain level-headed and not be lulled into indulgent overconfidence," he said in a note.

Indeed, he believes the Canadian dollar is mispriced right now, with the currency already reflecting slightly higher commodity prices over the next 12 months, interest rate hikes by the Bank of Canada totalling 100 basis points (or 1 percentage point) and an improving fiscal situation as the economy improves.

"Any disappointment in these expectations would weigh on CAD," Mr. Strauss said.

"Going forward, our econometric model suggests that further CAD strength will need the support of another aggressive rally in commodity prices, not too dissimilar to last year. This seems unlikely. The RBC base metals team continues to see a moderate downward correction in metal prices as the more likely scenario, while gains in crude oil prices will likely be limited to below $100 (U.S.) a barrel. Also, with the market already pricing in a slow recovery in the industrialized world and the 'emerging market miracle,' the likelihood of upside growth surprises seems limited. Also, a more aggressive monetary policy tightening than what is already priced in also seems improbable at this stage."

He concludes that a rise above parity with the U.S. dollar would be unsustainable.