Loonie at par by summer: CIBC
Written by on March 10th, 2010 in Latest News.
Interest rate increases will drive the Canadian dollar back up to parity with its U.S. counterpart by this summer, according to a report from CIBC World Markets.
The forecast is based on the expectation that the Bank of Canada will hike its key lending rate in July, at least six months ahead of the first hike by the U.S. Federal Reserve.
The dollar could hit $1.02 US by September, according to a currency forecast from CIBC World Markets. (Adrian Wyld/Canadian Press)
“Indeed, we’ve already seen the Canadian dollar gain several cents in recent weeks as the market started to firm up expectations” of a July rate hike in Canada, says CIBC chief economist Avery Shenfeld.
The loonie was quoted at 97.48 cents US in early Wednesday trading. It’s gained nearly 3.5 cents against the greenback in the last two weeks.
CIBC’s currency outlook sees the loonie rising to $1.02 US by September before slipping back to 97 cents US by the end of the year.
While the Bank of Canada’s early rate hike is one of the main catalysts of the dollar’s rise, it isn’t the only one, CIBC says.
Rising commodity prices a factor
The bank also lists rising demand for commodities as a reason. It sees the dollar benefiting from rising oil, mineral and fertilizer prices as Canadian producers “repatriate profits.”
With capital markets bouncing back, the forecast says the loonie also stands to gain because the rest of the world considers Canada to have one of the “friendliest” environments to make foreign acquisitions.
“If the capital markets finally get an appetite for M&A then Canada could be one of the first places to see the benefit of foreign inflows,” says CIBC analyst Zafar Bhatti.
Fears of default by a sovereign nation could also drive the dollar. “Canada is one of the few remaining AAA credits with a healthy outlook and the Canadian dollar could benefit from a switch trade out of weak sovereign names to Canada,” Bhatti says.
The last time the dollar reached parity with the U.S. dollar was in 2007 and 2008, when oil prices surged as high as $147 US a barrel.
