Money Is the Canadian Dollar Heading to Parity With U.S. Currency Again?

20:12  12 september  2017
20:12  12 september  2017 Source:   fool.com

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One of the biggest factors that makes a currency stronger is the interest rate differential. Investors move their funds in jurisdictions where they’re able to get the best returns. So, if the Canadian dollar isn’t headed to parity , then how far will it go?

A Canadian dollar , or loonie, sits on top of its American counterpart. In fact, the manufacturing numbers released by Statistics Canada earlier this week, which again While not all observers see parity as sustainable, some economists don't believe the currency is heading down more than a few

  Is the Canadian Dollar Heading to Parity With U.S. Currency Again? © Provided by Fool

After seeing a sudden jump in the value of Canadian dollar against its U.S. counterpart, many investors might be thinking about how far this move can go, and if the loonie can trade at par with the U.S. dollar again.

Let’s find out what’s driving the Canadian dollar higher and if those factors which propelled the currency to a 24-month high can support its surge to parity this time.

One of the biggest factors that makes a currency stronger is the interest rate differential. Investors move their funds in jurisdictions where they’re able to get the best returns.

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What if the one-year forward rate is also at parity (i.e., Currency A = Currency B)? Of course, at the beginning of 2002, with the Canadian dollar heading for a record low against the U . S Hedging exchange risk ( again , with the benefit of hindsight) in this case would have mitigated at least part of

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That’s the main reason fueling gains in the Canadian dollar for the past two months. The Bank of Canada, which has remained on the sidelines for almost seven years, started raising interest rates in July after a strong economic performance.

Surprising many analysts, the Bank of Canada acted again on Sept. 6 and raised its benchmark interest rate to 1%. These moves and the central bank’s bullish tone on the economy sent Canadian bond yields soaring.

For the first time since May 2015, the yield on the Canadian two-year government bond rose more than its U.S. counterpart, suggesting that investors are expecting the Bank of Canada will hike interest rates again.

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“(The currency has) been heading toward parity for weeks and it was inevitable. The Canadian dollar reached parity with the greenback in 2007, for the first time since the 1970 s , climbing to a modern-day high of US.1039 that November.

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By 1972, the Canadian dollar had traded through parity with its U . S . counterpart. It reached a high of US.0443 on 25 April 1974. Once again , the slide of the currency could be partly attributed to external. 80 A History of the Canadian Dollar .

"(The currency has) been heading toward parity for weeks and it was inevitable. The Canadian dollar reached parity with the greenback in 2007, for the first time since the 1970 s , climbing to a modern-day high of US.1039 that November.

.9999 to the U . S . dollar or .0001. It's been heading toward parity for weeks and it was inevitable.

How strong can the Canadian dollar get?

Let’s get back to that scenario that could make the Canadian dollar even against the U.S. dollar — a scenario we last saw in early 2013.

In order for the loonie to trade at parity, we need a strong rally in commodities, which make up a major part of Canadian exports. The move in the Canadian dollar has a strong correlation with oil prices.

When the Canadian dollar was at par in early 2013, for example, crude oil was trading close to $100 a barrel; the current price is $49 a barrel.

So, if the Canadian dollar isn’t headed to parity, then how far will it go? In the short run, it’s all about the expectations regarding Canadian interest rates. If the central bank pauses here and inflation remains subdued, I think we’re not going to see too much appreciation beyond 82 to 83 cents a U.S. dollar.

For the central bank, an interest rate move that’s too aggressive and too quick carries some risk at a time when Canadians are carrying a record level of debt.

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With the above in mind, there are certain categories of goods and services that are usually cheaper in the U . S . than in Canada , even without equal currency values, sales tax savings or major sales. With the Canadian dollar flirting with parity with the U . S . dollar yet again

It drifted to parity with the US dollar by 1972. On April 24, 1974 the Canadian dollar reached .0443 (US). This was the high point for the dollar from when it entered its most recent oat period and would not trade at these levels again for another 30 years.

Investor takeaway

The rising loonie presents some opportunities for investors looking to take advantage of this situation and re-adjust their portfolios.

Retailers and airline stocks, such as Dollarama Inc.(TSX:DOL), Canadian Tire Corporation Limited(TSX:CTC.A), and Air Canada (TSX:AC)(TSX:AC.B), are likely to benefit from a strong currency as their imports become cheaper and as Canadian travelers find their overseas trips more affordable.

Canadian exporters, such as West Fraser Timber Co. Ltd. (TSX:WFT), will find this sudden surge in the value of currency tough to stomach as rising currency eats into their margins.

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