Surging Canadian dollar eyes parity with greenback

Conditions are ripe for the Canadian dollar to again test parity with the greenback as more evidence emerges of an entrenched economic recovery and policymakers, including the Bank of Canada, seem more comfortable with the currency's latest rise.

Rallying for an 11th straight session on Friday, the Canadian dollar was homing in on parity with the greenback, a level it has not seen since July 2008. The currency's road to 20-month highs has been helped by firm commodity prices, such as important Canadian export oil, and a growing sense that the Bank of Canada might raise interest rates sooner rather than later as economic data such as jobs numbers and trade data continue to top forecasts.

Also, compared to other economies that are running deep deficits, Canada's record deficit of nearly C$54 billion(Dh194.8bn) seems downright manageable.

"Just take a step outside of Canada and it looks fantastic compared to the rest of the world, and hence one of the reasons why the currency continues to appreciate and draw buyers," said Andrew Busch, global currency strategist at BMO Capital Markets in Chicago. At 3.45 pm (2045 GMT) on Friday, the Canadian dollar was at $1.0180 to US dollar, or 98.23 US cents.

Increasingly, reaching parity against the US dollar is a question of when, not if, and whether it can stay there.

"We'll need a lot of good economic data and positive developments to give the market comfort that it is achievable in the near term, sustainably," said Sacha Tihanyi, currency strategist at Scotia Capital. Parity views are mounting. CIBC World Markets said this week it now expects the Canadian dollar to soar above par with the US dollar by September, a reflection of its view that the Bank of Canada will raise interest rates a full six months ahead of the US Federal Reserve.

Yields on overnight index swaps, which trade based on expectations for the Bank of Canada's key policy rate, edged higher on Friday after data showed the economy added more jobs than expected and the unemployment rate fell. A level of comfort with the improving economy may also be at play among policymakers, suggesting that the Canadian dollar's move higher has been justified by economic fundamentals – which they can put up with – rather than speculation.

Finance Minister Jim Flaherty said he is always worried about volatility in the currency. But for a second time in a week, he also noted that a stronger currency did have advantages, in that it helped Canadian manufacturers acquire foreign technology and thereby become more competitive.

That is a far cry from last summer when Flaherty raised the possibility that "some steps" could be taken to slow the rise of the Canadian dollar that seemed to be partially spurred by speculative buyers, recalled Matthew Strauss, senior currency strategist at RBC Capital Markets.

Without much verbal intervention, the currency may find itself a little freer to keep heading higher, particularly with the economic data proving supportive.

"It's a very interesting shift compared to last year," said Strauss. "I think it also suggests the government is accepting that the current levels of the Canadian dollar is driven by fundamentals and, even more importantly, we got to these levels in a more coherent way."

And while it has been popular opinion that manufacturers are the most pressured by fluctuations in the currency, a new study on Friday from the Conference Board of Canada found this is not necessarily  the case. Instead, the services sector may potentially be more exposed because these firms typically do not have as solid a currency hedging strategy.

The Bank of Canada has also scaled back its views of the impact of a stronger currency. Last year it said a stronger Canadian dollar

could "more than fully offset" favourable economic developments, but its latest statement earlier this month noted the "persistent strength" of the currency continues to act as a "significant" drag on the economy. "I think as long as the Canadian dollar appreciates on a more stable basis, it's probably something the Bank of Canada is willing to put up with. It's really the volatility that's the big issue," said Tihanyi. (Reuters)

 

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