Expectations of higher interest rates and investor demand for Canada will help drive the Canadian dollar past parity with the U.S. greenback by this summer, says CIBC World Markets.
In a report, the investment bank notes the loonie has jumped above 98 cents US in recent weeks as investors expect interest rates to rise in Canada later this year. Higher interest rates – the bank expects a jump of three quarters of a point – make Canadian bonds and other investments more attractive and raises demand for the loonie. Other factors that could help the currency are world demand for commodities such as oil, minerals and fertilizers and foreign acquisitions of Canadian companies by U.S. or overseas buyers.
“Indeed, we’ve already seen the Canadian dollar gain several cents in recent weeks as the market began to firm up expectations” of an interest rate hike in July by the Bank of Canada, said Avery Shenfeld CIBC’s chief economist.
“If as we expect, the Bank is out in front of the U.S. Federal Reserve by a couple of quarters, a higher Canadian dollar will help tighten monetary conditions. It’s easy to see the Canadian dollar running a few cents through parity after the first hike.”
CIBC’s currency forecast sees the loonie reaching US$1.02 against the U.S. dollar by September before dipping back to 97 cents US by the end of the year. That reflects the investment bank’s view that the Bank of Canada will raise interest rates in the third quarter, a full six months ahead of the U.S. Since the Canadian economy is recovering more strongly from recession than the United States, inflationary pressure are building more rapidly north of the border than in the U.S.
“Nobody should be surprised if the Bank of Canada begins hiking rates as soon as its June-end line in the sand has passed,” said Shenfeld, adding he expects rate increases to be implemented in a measured way.