Loonie nears 30-year high
Globe and Mail Update
TAVIA GRANT
May 18, 2007 at 4:16 PM EDT
The Canadian dollar hit its highest intraday level in almost three decades Friday, and many strategists believe the currency has further to go.
The loonie touched 91.85 cents (U.S.) on Friday after a much stronger-than-expected report on retail sales. The dollar closed the day slightly lower, at 91.79 cents.
The last time the loonie was this strong was Oct. 11, 1977.
The currency's gained 7.2 per cent this year against its U.S. counterpart. Several factors have greased the currency's gain, among them strong economic data, a pickup in core inflation, increased merger-and-acquisition activity and rising commodity prices.
"There really isn't much reason to be bearish about the Canadian dollar right now," said David Watt, senior currency strategist at RBC Capital Markets. He sees the loonie strengthening to 92.50 cents in the third quarter of this quarter before retreating later this year.
He said Friday's move began in London, when traders got into the office and saw oil prices at a three-week high.
It extended gains after a retail sales report Friday more than doubled expectations, surging 1.9 per cent in March as Canadians bought more cars.
It was the second economic report in two days to top expectations. On Thursday, a report showed core inflation rose the most in four years, increasing the odds of higher interest rates in Canada. The rising cost of homes was the main reason for the increase.
A stronger loonie is welcome news for travellers heading south and a vote of confidence in Canada's economy. It spells more pain, however, for Canadian factories because it makes their goods more expensive when sold abroad. Manufacturers have cut 89,400 jobs over the past year.
The currency has now surpassed last May's high of 91.44 cents. Its latest ascent has reignited talk of parity.
Predictions that the currency will reach equal value with its U.S. counterpart surfaced last May too, when the loonie hit a 28-year high against the greenback. But the loonie subsequently eased and speculation subsided.
It's back now, however.
Economists at National Bank Financial, Bank of Montreal and Canadian Imperial Bank of Commerce have all mentioned the parity word in notes over the past week.
Last Friday, BMO said if the loonie continued at its current pace, it would reach parity by the autumn.
It cited five factors underpinning the loonie's recent gains: a weaker U.S. dollar, rising commodity prices, capital inflows stemming from mergers and acquisitions, changing market sentiment and a shift towards tightening by the hawkish Bank of Canada.
BMO doesn't, however, believe the currency will hit parity. In the research note last week, it said the currency "has run a little ahead of itself and is due for a modest pullback."
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