TORONTO — 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 Wednesday, 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. In Wednesday trading, the Canadian dollar rose 0.05 of a cent to 97.48 cents US, near its highest level of the year. “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. Since the Canadian economy is recovering more strongly from recession than the United States, inflationary pressure are building more rapidly north of the border. Shenfeld expects rate increases to be implemented in a measured way.