Canadian Dollar Should Stay Over Parity For Now. By Nicholas Hastings

A strong Canadian dollar is here to stay for another month or two at least.

After weeks of trying, the Canadian currency has finally made what appears to be a sustainable break through parity against the dollar.

The move came after the Bank of Canada virtually confirmed that it will be hiking its interest rates before the U.S. Federal Reserve.

With the bank also expressing little concern about the Canadian dollar's recent strength and with recent signs of global recovery likely to keep commodity prices on the rise, there is little reason for investors to stop buying the Canadian currency just now.

On the contrary, some analysts are looking for the U.S. dollar to fall as far as CAD0.95 in the next few months, especially if inflation data due later this week suggest the central bank will have to continue hiking rates later this year.

See how the Canadian dollar finally made it over parity:



This shift in sentiment towards the Canadian dollar came after the Bank of Canada surprised financial markets Tuesday with its highly upbeat assessment of the Canadian economy, forecasting that full capacity will be attained by the second quarter of next year.

The bank also abandoned its promise to keep monetary policy unchanged until July, raising hopes that it will increase the overnight target rate from its current emergency low of 0.25% as early as June.

This will not only mean that Canadian interest rates have started to rise at least or month or two ahead of U.S. rates, but it also means Canada will be the first G7 nation to move rates up again after the credit crunch.

Support for the currency will also come from increasing evidence that other major industrialized nations are preparing to follow in the footsteps of smaller countries such as Australia and Norway, which have already raised their rates.

All this evidence of a global economic recovery is feeding into higher commodity prices and providing additional support for commodity currencies, such as the Canadian dollar.

The Bank of Canada's apparent confidence that the economy can cope with a strong currency, even though the U.S. dollar has fallen from over CAD1.30 in early 2009, only makes the Canadian dollar even more attractive as the central bank is unlikely to start talking it down just now.

How far the Canadian dollar can rise and how long it can stay so strong depends now on how far speculators are prepared to extend their positions and how quickly the U.S. Fed decides it is time for U.S. rates to move higher.

Recent data from the Chicago Mercantile Exchange show that the Canadian dollar and its Australian counterpart have been "star performers" with long positions now close to their record highs, according to Credit Agricole.

Whether they are prepared to push positions even higher will depend not only on how much further the Bank of Canada is likely to continue hiking rates later this year but also on how quickly the U.S. Federal Reserve starts to follow suit, providing support for the U.S. dollar and reducing the scope for further Canadian dollar gains.

Early Thursday, the U.S. dollar continued to drift lower--falling to CAD0.9977 by 0645 GMT from CAD0.9996 late Wednesday in New York, according to EBS.

There was a general dip in global market sentiment as investors wait for some positive news out of Greek debt negotiations in Athens and fear that other European countries will face difficulties raising funds.

The euro was up a little at $1.3403 from $1.3393 but it fell to Y124.69 from Y124.82.

The dollar was down at Y93.00 from Y93.19 as suggestions that the Bank of Japan will upgrade its outlook for the economy Friday lifted support for the yen.