Traders flock to loonie on flight toward parity

The loonie flew flat on Monday, but that’s not likely to deter global investors from following the Canadian dollar in the long term as it heads towards parity, experts say. But a high dollar could also put some Canadian businesses at risk.

Solid fiscal fundamentals and high mid-term government bond yields means Canada’s debt markets will continue to attract plenty of foreign interest this year, Bank of Montreal senior economist Sal Guatieri said in a note Monday.

In 2009, foreign net purchases of Canadian securities, including bonds, hit a record $109 billion — or more than twice the previous high, recorded back in 1970.

And bets the currency will rise further spiked 60% last week with the loonie now enjoying the largest net long position against the U.S. greenback, the Bank of Nova Scotia said citing the Commodity Futures Trading Commission.

Overall, the loonie has been the best performing major currency of the last three months and is up 26% against the U.S. dollar in the past year.

The currency hit 98.38 cents US overnight but by midday Monday it had come down slightly to 97.94 cents US as the greenback got a boost from the U.K.’s heavy pound.

On Friday, the loonie capped off a lofty 11-day winning streak driven by better-than-expected economic data, firmer commodity prices and expectations of rising interest rates.

The dollar’s 20-month high, at 98.50 cents US, led analysts to speculate when, rather than if, the currency might reach parity with its U.S. counterpart.

CIBC and Scotiabank both see the tipping point arriving sometime in the second quarter.

This time, BMO expects parity to last longer than in years past, with the Loonie ranging between 97.60 cents US and $1.02 US for at least the next few months.

“Against the crosses, the Canadian dollar is once again out-performing, and should continue to do so,” Gencher said.

THE CONSEQUENCES

Speculation has fuelled concern over what a higher dollar would do to Canada’s already hard-hit manufacturing base.

When parity last struck in 2007, exporters said they suffered massive losses as exchange rates made their goods too expensive for buyers south of the border.

But a new report by the Conference Board of Canada said manufacturing — as well as mining, oil and gas industries — are more likely to be able to weather the effects of a volatile dollar because of their increasingly global nature, with many new ways to hedge against currency fluctuations.

But Canada’s service industries may prove more vulnerable, the think tank said. They generally internationalize via limited means and therefore have a more limited hedging capacity. Transportation and warehousing, utilities, retail and wholesale trade, information and cultural industries are most at risk by movements in the dollar.

“In today’s global economy, Canadian industries must continue to internationalize to remain competitive. A firm that uses various approaches to globalization simultaneously will be better positioned to reduce the financial risks associated with changes in the value of the Canadian dollar,” said Louis Theriault, director, international trade and investment at the Conference Board of Canada.

Ottawa could further liberalize trade and update foreign direct investment rules to help mitigate losses, the Conference Board added.