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The Canadian dollar could test highs not seen since before the world financial crisis if the economic recovery stays on track, building on Thursday's jump to its highest level in almost three years.

Analysts see few technical barriers in the way of further gains after the currency broke briefly above the range of 98.32 cents to $1.0060 to the U.S. dollar that it had held so far this year.

The loonie reached $1.0187 (U.S.), its strongest level since March of 2008, as tensions in the Middle East weakened the greenback and steady oil prices supported the Canadian dollar.

"We're sitting at key technical levels right around here. A clear break of these levels opens up first [98 cents Canadian to the U.S. dollar] and then we're in uncharted territory," said Paresh Upadhyaya, head of Americas G10 FX Strategy at Bank of America Merrill Lynch in New York.

He noted that the Canadian currency mounted a short-lived campaign to close in on 90 Canadian cents to the U.S. dollar in 2007, making one Canadian dollar worth $1.11 (U.S.).

A "stellar" fundamental backdrop is contributing to the currency's relative stability above parity, Mr. Upadhyaya said.

That includes an unexpectedly robust trade surplus of $3-billion (Canadian) in December, underpinned by exports of oil and other energy products. It was Canada's first trade surplus after nine consecutive months of deficits.

The trade data pointed to stronger fourth-quarter economic growth than analysts had expected, and helped offset drag from housing starts and slower-than-expected factory sales.

A global Reuters foreign exchange poll earlier this month showed that forecasters expect the Canadian dollar to hold steady around the U.S. dollar this year, supported by global growth prospects.

"We have been in a fairly narrow range. Ordinarily a range breakout would suggest an increase in volatility and perhaps potential for a bit more dynamic … markets to come," said Shaun Osborne, chief currency strategist at TD Securities.

The Canadian dollar could struggle to set new highs ahead of the Bank of Canada's March 1 rate announcement.

Few market observers expect the central bank to raise rates, although inflation data due on Friday will go a long way in cementing views.

But the central bank could voice concerns a strong currency will threaten the export sector and economic growth.

"It's probably still going to be a case in the short term of playing the range," said Jeremy Stretch, head of currency strategy at CIBC World Markets in London.

"If [inflation numbers]come out on the firmer side, then that might continue just to keep the currency reasonably well bid and see some impetus to continue to try and test those buying levels … in the short term," he said, noting that 98.20 cents to 98.40 cents are being eyed as U.S. dollar buying levels.

The dollar closed Thursday at $1.0153 (U.S.).

The market is currently pricing in about a 99-per-cent probability that Bank of Canada will leave its overnight rate at 1 per cent, according to a Reuters calculation of yields on overnight index swaps.

The implied year-end rate, as measured by the swaps, suggests at least three rate hikes by year end.

Higher interest rates could lift the Canadian dollar, even as the Bank of Canada frets about the impact of a high loonie on exports, the backbone of the domestic economy.

But the central bank may be heartened by the Fed's confidence in the U.S. recovery, given that U.S. growth could boost Canadian exports and ease fears that the Canadian dollar's strength will drag on economic growth.

"But even then, I don't think they are going to completely throw up their hands and say that they're comfortable with the Canadian dollar at these levels, particularly as oil prices are just frustratingly stable as they were for the past two months," said David Watt, senior currency strategist at RBC Dominion Securities Inc., noting that the Bank of Canada's commodity index is largely weighted to energy.

"That will always make the Bank of Canada somewhat cautious that further gains in the Canadian dollar above parity are going against the run of one of our major export sectors."

While the Brent crude oil price in Europe has touched a near 2-1/2 year peak, its U.S. counterpart has lagged due to higher North American supplies. The main export market for Canadian oil is the United States.

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 28/03/24 4:15pm EDT.

SymbolName% changeLast
BAC-N
Bank of America Corp
+0.29%37.92
CM-N
Canadian Imperial Bank of Commerce
+1.3%50.72
CM-T
Canadian Imperial Bank of Commerce
+1.13%68.67

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