Canadian dollar hits parity, the 'new reality'

The Canadian dollar hit parity with its U.S. counterpart Tuesday, and economists believe the currency will remain strong for months.

The loonie hit $1.0001 at 6:48 a.m. ET, and hovered around the parity mark since. It's the first time since July 21, 2008 that the currency has traded on an even basis with the greenback. It hit an intraday high of $1.10 in November, 2007.

The currency is riding a wave of popularity with investors as oil prices hit 18-month highs, economic releases top forecasts and expectations grow that the Bank of Canada will hike its key lending rate this summer, well before the U.S. Federal Reserve makes a move. Canada is widely seen as leading economic growth among G7 countries this year.

Add to that a stable banking system and a more solid fiscal position and "it makes Canada stand out," said Matthew Strauss, senior currency strategist at Royal Bank of Canada. A confluence of factors "are making Canada one of the preferred investment destinations and the Canadian dollar one of the preferred currencies."

He sees the currency remaining at these levels or a bit above. Bank of Nova Scotia believes the loonie will hover on either side of parity in the near-term, but "that the Canadian dollar at and through parity will prove a longer term reality for Canada than it was in 2007."

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"Parity is the new reality," Scotiabank's currency strategist Camilla Sutton said.

That reality has a number of consequences. In the near term, it will almost certainly increase pressure on Canadian retailers to cut their prices to match U.S. levels. Clothing retailer Brooks Brothers, said yesterday it is trimming prices to make them more in line with its U.S. outlets.

It's welcome news for travellers headed to the United States, who will find travel much more affordable. Those headed to Europe this summer will also feel the effects of the strong currency, with the loonie appreciating against the euro and British pound as well.

It now costs Canadian sports teams less to hire U.S. players and pay them in the U.S. currency.

Importers of goods will see prices ease. And Canadian companies will find it cheaper to snap up foreign rivals.

The ascent will weigh on exporters and companies without hedging strategies, though, which will see margins squeezed and their goods less competitive when sold abroad. That, in turn, could eventually dent Canada's gross domestic product just as the economy emerges from recession.

Canada is widely seen as the strongest-performer among G7 nations this year. The G7 is made up of Canada, the United States, France, Germany, Italy, Japan and the United Kingdom.

With files from Michael Babad