‘Certainly I think it's a little more sustainable now than in the past,' says Scotia Capital currency strategist Sacha Tihanyi
Michael Babad and Jeremy Torobin
Globe and Mail Update
The Canadian dollar (CAD/USD-I0.990.0050.55%) cracked the 99-cent U.S. mark Wednesday, inching ever closer to parity with the U.S. currency as traders bet on a strong Canadian recovery and continued fiscal prudence from the Harper government.
“Wayne Gretzky would be proud,” said Eric Lascelles, chief Canada macro strategist at TD Securities, referring to The Great One's hockey jersey number.
The loonie, which climbed past 99 cents and then fell back slightly, has now shot higher in 12 of the last 13 trading days.
Economists credit the economy, Ottawa's fiscal projection and firm commodity prices for the attractiveness of the loonie. Also at play are expectations in the markets that the Bank of Canada
will hike interest rates before the Federal Reserve, which pledged again Tuesday to hold its benchmark rate at its historic low near zero for an extended period.
The dollar is on its way to parity with the greenback, said Scotia Capital currency strategist Sacha Tihanyi, but just when that happens “depends on whether we get that speculative push”.
For businesses that must factor in costs, the dollar is effectively there, added Beata Caranci, director of economic forecasting for Toronto-Dominion Bank.
With parity in sight, the question now becomes whether it can last. When the dollar last eclipsed the U.S. currency a few years ago, it hit $1.10 (U.S.) in September, 2007, before tumbling back down and hovering around parity for around 10 months. It hasn't hit parity since July, 2008. How long will it last this time?
Scotia Capital, for one, forecasts that the dollar will hit parity by June – the end of the second quarter this year, climbing to about $1.02 by the end of the third quarter, about $1.03 by the end of the year and about $1.05 by the end of 2011, assuming the U.S. economy rebounds robustly in the next two years and commodity prices remain firm.
“Certainly I think it's a little more sustainable now than in the past,” Mr. Tihanyi said, though that depends on sustained foreign demand, particularly in the United States.
Canada's “fundamentals” support that view, he said, citing stronger domestic demand in Canada, recovering exports, better employment prospects, the attractiveness of Canadian assets and a fiscal regime that is “the envy of the G7”.
Some other observers, while agreeing with the attractiveness of the economy and the world view of Canada, don't believe parity can last beyond a matter of months.
“Parity is still a bridge too far, at least, to last,” said Mr. Lascelles of TD Securities , noting that oil prices (CL-FT82.911.211.48%) aren't as high as in the past and, even if the Bank of Canada boosts rates before the Fed moves, it will not remain ahead for too long.
It's a challenge to peg the fair value of a currency, Mr. Lascelles added. And based on purchasing power parity, “for prices to be equivalent between Canada and the U.S., 85 cents is your actual exchange rate, but in a world of imperfect trade, it's quite possible for other factors to dominate, and that's what's happening right now”.
Ms. Caranci noted that the last time the dollar topped the greenback, the move hurt exports, in turn dampening economic growth prospects and knocking the currency down again. So, she added, parity this time around might last a couple of quarters, but likely not longer.
The Globe and Mail
