TORONTO (Reuters) – The Canadian dollar looks set to extend a rally that’s taken it to 3-1/2 year highs against the U.S. dollar this week, as more hawkish Bank of Canada comments lifted the currency and global investors pushed into the safety of Canadian assets.
Given the central bank’s clear signal it would likely resume interest rate hikes later this year, analysts said the currency might even revisit its modern-day high. It reached C$0.9059 to the U.S. dollar, or US$1.1039, in November 2007, according to Thomson Reuters dealing data.
“Yes, Canada could hit post-Civil War highs once again,” said Michael Woolfolk, a senior currency strategist at BNY Mellon in New York.
“(Hitting the high) would not be altogether unwarranted if Canada begins raising interest rates again. It’s certainly not in our forecasts, but it’s a nontrivial possibility of hitting C$0.90 within the next 12 months.”
Based on available data, the Canadian dollar was at an all-time high of C$0.36 to the U.S. dollar, or $2.78 in 1864.
A survey on Wednesday of Canadian primary dealers found most expect a rate hike in September or October, perhaps as much as a year before the U.S. Federal Reserve starts raising interest rates.
“Against a background of firm commodity prices and continued global diversification flows to the relatively safe harbor of Canadian bonds, we look for the loonie to stay close to around US$1.05 even by the early part of 2012, before Fed rate hikes start to kick in,” said Douglas Porter, deputy chief economist at BMO Capital Markets in a note.
The currency began rallying on Tuesday after the Bank of Canada signaled it was closer to resuming rate hikes. Governor Mark Carney indicated that the central bank’s focus was on inflation and not the Canadian dollar, despite concerns that a strong dollar could hurt the economy.
But other G10 currencies are still outperforming the Canadian dollar, with part of its strength coming from U.S. dollar weakness, and general strength from the bloc of Australian, New Zealand and Canadian dollars.
A release of draft conclusions from a euro zone meeting on Thursday to tackle contagion from Greece’s debt woes helped push the Canadian dollar to a 3-1/2 year high of C$0.9425 to the U.S. dollar, or $1.0610, its highest since November 2007.
“That was viewed very constructively by the market and lifted the euro up. It also helped bolster risk appetite, which undermined the U.S. dollar,” said Woolfolk.
Canada, with its relatively robust economy, stable debt market and internationally recognized sound banks, has become particularly appealing to investors as the U.S. and European debt crises send investors elsewhere.
“As uncertainty in Europe continues to rise and problems in the U.S. remain at the forefront, there is likely increased appetite to diversify holdings away from both USD and EUR based assets,” Scotia Capital chief currency strategist Camilla Sutton said in a research note.
“Small open economies, with strong sovereign positions and flexible FX regimes, like CAD, are in demand. We expect this is a long-term trend…that will help support CAD into year-end.”
Currency analysts polled by Reuters said this month they expected global risks to drag the Canadian dollar down against a stronger U.S. dollar, with parity a possibility within the next 12 months.
Marc Chandler, global head of currency strategy at Brown Brothers Harriman, said a stronger Canadian dollar will hurt non-commodity aspects of the economy, such as manufacturing.
“The Bank of Canada will get more concerned about … the higher currency and may dampen expectations of a rate hike,” Chandler said.
“The exports are heavily weighted toward commodities, but part of the country doesn’t produce commodities, they’re consumers of commodities. They get hurt, so it leads to this bifurcation of the economy, which makes it all the more difficult to conduct monetary policy and has political ramifications.”
“We think conditions warrant higher interest rates in Canada, but (the central bank) is likely holding back because of the obvious positive it would have for the currency,” he said.