The Canadian dollar has reached parity with its U.S. counterpart because of the Bank of Canada’s commitment to a tightening bias. Despite struggling economies in the U.S. and the euro zone, the Canadian dollar will likely hover around the parity mark for the remainder of the year, according to one analyst.
“The Bank of Canada continues to display a tightening bias, so that is prompting people to expect that the bank will be one of the first of the central banks to tie in rates,” said Shaun Osborne, chief FX strategist with TD Securities.
Osborne added that in the current macroeconomic environment, the Bank of Canada raising its key interest rate would be “a bit of a stretch.” Nonetheless, spreads for Canadian stocks have widened compared to U.S. stocks, making the loonie more desirable for investors, he added.
Stable commodity prices have also provided underlying support for the Canadian dollar, Osborne said. He added that Canadian crude oil has been sitting close to the C$100-per-barrel mark, which has continued to support the upside in the Canadian dollar.
However, even though commodity prices are sitting high, lower export figures for the country have weighed on the Canadian dollar’s value. He said that in a weak global growth environment, Canada has struggled to make profitable trade with other countries.
“There’s a negative in terms of trade effect that is quite apparent for the Canadian economy from a longer-term point of view. It suggests to me that the Canadian currency is somewhat overvalued at these levels,” Osborne said.
The key factor to turning exports around would be increased demand for Canadian goods and services in the U.S. But growth in Europe and Asia has slowed as well, so increasing exports will likely be a long-term issue for the value of the Canadian dollar, Osborne said.
Going into 2013, Osborne expects a relatively low-volatility market for the Canadian dollar. He added that values for the loonie shouldn’t drop lower than US$0.95, but could push as high as US$1.05.
If the Bank of Canada does raise its key interest rate as expected in 2013, the Canadian dollar could see further strength. But the U.S. Federal Reserve has shown an easing bias that would leave the Bank of Canada hard pressed to raise its key interest rate, as Canada’s central bank is so tightly linked to the U.S. central bank, Osborne said.