The Canadian dollar is the strongest it has been since 2007 and some analysts think it will appreciate even more.
ScotiaBank thinks the loonie will remain above par the rest of this year and strengthen in 2012 toward $1.08, but still shy of the November 2007 peak of slightly more than $1.10.
BMO forecasts the loonie will stay close to today’s level through this year and then weaken a little next year, back closer to par by the fourth quarter of 2012.
RBC forecasts the loonie will remain at about $1.05 this year, but fall back to par in the second quarter next year and drop down to about 98 cents in the second half of 2012.
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Regardless of the details, all the forecasts point to the longest period of the loonie at or near par in decades.
The loonie is strong for several reasons.
Canada is a major exporter of oil and other commodities that are enjoying high prices, meaning a lot of money flows into the country when we sell our commodities. Also the federal fiscal situation is better than in the U.S.
Another factor is that the recession did not hit Canada as hard as it hit the U.S. Our financial system was better regulated so banks did not collapse. The strong commodity sell. It also hurts processor-exporters like Maple Leaf and canola crushers.
Of course, it is a lot easier for farmers to accommodate a strong currency when agricultural commodity prices are high.
Still, a strong loonie puts Canadian farmers at a competitive disadvantage to their American counterparts on the export market.
The gap can be offset if Canadian producers maximize their productivity.
The strong loonie can help on that score by lowering the cost of import-e d machinery and technology, allowing farmers to upgrade the tools needed to become more productive and competitive.
Current low interest rates also encourage productivity investments, but farmers will have to careful about their debt levels.
Most analysts believe that as the economy gains traction and inflation creeps up, the Bank of Canada will start another round of interest rate increases in the second half of this year and further increases in 2012.
BMO sees the overnight rate rising to 3.5 percent by the end of 2012.
