This could well be the year of the loonie.
While the Canadian dollar may not rack up the hefty gains of, say, 2009, when it climbed 16% it is expected to still remain strong throughout the year.
Yesterday, Goldman Sachs Group Inc. projected the loonie will trade at about $1.05 U.S. That's close to the $1.04 predicted by Scotia Capital, where currency strategist Camilla Sutton projects a strong year for commodity-linked currencies in general.
"We are beginning 2011 with a notably strong [Canadian dollar]," Ms. Sutton said. "Risks stemming from Europe and the global recovery remain a key threat; however the combination of loose U.S. monetary policy, a global search for yield and diversification combined with a generally weak [U.S. dollar] should help to support [the Canadian dollar] through parity."
The loonie continued today to trade today above parity. Ms. Sutton noted that the currency's strength to date has been largely driven by a weaker U.S. dollar and higher commodity prices. While the difference between interest rates in Canada and the United States hasn't yet been a factor, she added, it will become one later in the year.
The strength in the dollar is a concern for the Bank of Canada, and comes amid a so-called currency cold war that has seen other countries manipulate their money to hold down values, in turn keeping down prices of their exports.
The loonie's strength, added Scotia Capital economists Derek Holt and Gorica Djeric, will stop the Bank of Canada from raising its benchmark rate again until October.
