Canadian dollar seen holding near parity for rest of 2012

Stronger Canadian and US economies and the stabilising of Europe's debt crisis will make for a less volatile Canadian currency, which is expected to hold near parity with the US dollar for the next year, a Reuters poll showed. Since firming above the one-for-one level with its US counterpart in late January a s global economic conditions improved, Canada's dollar has traded within a relatively tight range of less than 2.5 cents.
The currency is expected to remain near current levels over the next 12 months. The median forecast in a survey of 52 global foreign exchange strategists released on Wednesday showed the Canadian dollar a t exactly $1.00 in one, three and six months from now. In a year, the currency is expected to strengthen slightly to C$0.988 versus the US dollar.
The 1-, 3-, and 6-month forecasts were unchanged from the previous month. Twelve-month predictions for the Canadian dollar varied from a high of C$0.9940 against the US dollar, or $1.0060, to a low of C$1.120 against the greenback. "The Canadian economy should mildly outpace the recovery in the US, which would keep the Canadian dollar stronger than the US (dollar)," said David Bradley, a director of foreign exchange trading at Scotia Capital.
"I don't see the Canadian dollar running away." On Wednesday, the currency stood at C$0.9948 versus the US dollar. It has gained about 2.5 percent against the greenback this year. Canada weathered the global recession better than its largest trading partner, retaining its vaunted triple-A credit rating, avoiding a housing crisis and keeping unemployment below US levels.
However, the US economy has recently accelerated while the Canada's growth has slowed. But the two economies remain closely linked and that has helped the Canadian dollar outperform most major global currencies so far this year. "If the US does better then Canada is going to do better also," said Bradley.
This week, Bank of Canada Governor Mark Carney said the Canadian economy is doing better than expected and the threat from the European debt crisis has lessened. The central banker also warned that businesses should not rely on the Canadian dollar depreciating in value against the US currency to make exports more competitive Carney's comments prompted some traders to price in higher odds that the central bank will hike its key lending rate by the end of the year.
But the median forecast in a recent Reuters poll of primary dealers shows they expect the first hike in the third quarter of 2013. The Bank of Canada is seen raising interest rates ahead of the US Federal Reserve, which said in January it would likely hold its key rate at its present level near zero until late 2014.
This is why most analysts predict the Canadian dollar will be slightly stronger against the US dollar a year from now. Higher interest rates tend to help currencies strengthen by luring capital flows from abroad. However some see Canada's currency being hurt over the near term by a pullback in equity markets and commodity prices, which have risen consistently over the first three months of the year. T he MSCI world equity index is up about 11 percent since the start of 2012.
"The market's run for a couple months now in a one-way direction and it's looking like it could be in for a bit of a correction," said Greg Moore, foreign exchange strategist at TD Securities. Other potential downside risks for the Canadian dollar include a sharp slowdown in China's economy that would negatively impact growth-related commodities such as copper and oil, whose rise above $100 a barrel has helped prop up the Canadian currency. "Canada is definitely going to sell off if there was a significant slowdown in China which seems to be one of the main drivers," said Bradley.