Dollar may fly higher yet By Paul Vieira Feb 17

 OTTAWA The slow but steady climb of the Canadian dollar reached a three-year high Thursday, and currency watchers say the upward momentum has legs in the long run on the strength of commodity demand from emerging markets.

     A sign of things to come, one observer says, but others expect turbulence.

 The dollar’s rise is also a reflection of the country’s sterling fiscal fundamentals, at least compared with most other industrialized countries — especially the United States where the budget situation is “horrendous,” Prime Minister Stephen Harper said at a media conference Thursday.

 The Canadian dollar’s ascent toward a three-year high “is just a sign of things to come,” said Michael Woolfolk, managing director at BNY Mellon Global Markets in New York.

 The Canadian dollar reached as high as US$1.0185 in trading before settling at US$1.0153, or unchanged from Wednesday’s trading session. Mr. Woolfolk’s forecast is for the loonie to hit US$1.06 by the end of this year, and he added that estimate could be on the conservative side should yield spreads widen between Canada and the United States.

 The Canadian dollar’s success, though, has consequences: namely, a need for the private sector to adapt, a point Bank of Canada governor Mark Carney has tried to hammer home in recent remarks about the productivity challenge.

 “We have to become like Germany, or closer to home like the United States, where productivity growth has gone nuts,” said David Watt, senior fixed-income and currency strategist at RBC Capital Markets.

 Other analysts, though, caution the loonie’s rise may hit turbulence in coming months, as commodity prices soften should policymakers in China and other developing markets move to cool down growth.

 Furthermore, the recent rise in the loonie unfolded even though prices for commodities closely linked to Canada — like natural gas, oil and some base metals — have remained soft.

 “It is going to be relatively tough for the Canadian dollar to make too much in the way of additional traction from here,” said Jeremy Stretch, head of currency strategy at CIBC World Markets.

 Mr. Stretch said the Canadian currency could be held back by increased appetite for U.S. dollars as stronger U.S. economic data continue to emerge. For instance, the Philadelphia Fed gauge of business activity in the U.S. mid-Atlantic region grew more than expected for February to a seven-year high.

 The dollar’s most recent high was in November 2007 when it hit US$1.09 on the strength of a commodity bull run that let Ottawa post large budget surpluses. But the loonie, like most other currencies, took a deep hit as a result of the credit crisis as traders sought safety in U.S. Treasuries. It fell to US76.9¢ in March 2009.

 The loonie’s rise from that low reflected growing confidence that the crisis had passed and the global economy was on the upswing. According to Mr. Watt, the outlook for the Canadian dollar remains positive on continued robust commodity demand.

 “We are going to more likely see a situation where the Canadian dollar will linger at stronger levels than we have seen historically, based on India, China and commodities,” he said.

 A key part of Mr. Watt’s thesis is the fast rate of urbanization in China and India. His estimates suggest China and India need to build a city roughly the size of Dallas — 1.3 million people — a month over the next 20 years, and that rate of urbanization “creates an ongoing demand for commodities.”

© 2011 financialpost.com