The Canadian dollar may be reaching a peak versus the U.S. greenback as global monetary tightening increases, according to Ashraf Laidi, chief market strategist for London-based CMC Markets.
"We could very well touch parity very soon in the next week or so, but whether we stay above it, I think not," he said.
Laidi is in Vancouver to meet clients, and in a BIV interview, he suggested the loonie may gradually retreat to the low US$0.90 by the end of April if the Bank of Canada does not provide clearer signals that it plans to raise its overnight rate.
He said the current rise of the loonie versus the U.S. dollar has been the result of market expectations of a rate hike this summer, coupled with growing global risk appetite and improved economic performance.
He noted, however, these international factors have made the Canadian dollar one of the strongest currencies in the world, vying with Australia's dollar for bragging rights as the best performing currency to date in 2010.
While the steady rise in oil prices have contributed to the loonie's rise, its relative strength as one of the most financially sound economies has also been a factor.
"The striking prominence about the loonie is that it's doing well against its energy counterparts. While the Norwegian Krone is tied to gas and oil, the Canadian dollar has hit a 27-year high versus the Krone."
International factors, however, could begin to take some shine away from the Canadian dollar, even with an interest rate hike. He said the Federal Reserve is likely going to increase the discount rate it charges to banks, which is the rate charged for emergency funds banks may need.
Before the financial crisis, the discount rate was at least 100 basis points higher than the federal funds rate. It's currently only 50 basis points above. "The rationale is, they will raise it to 100 basis points and after that, they will raise the fed funds rate. This will be positive for the U.S. dollar."
Other emerging economies are also tightening their monetary policy, which could neutralize the positive effect a Bank of Canada rate increase would bring. On Friday, the Reserve Bank of India unexpectedly increased its interest rate a month ahead of its regularly scheduled meeting, suggesting further tightening is in the cards. The Bank of China is also considering rate increases, an event that has not happened since 2007.
"The tightening cycles of China and India are parts of the elements that would weigh on global risk appetite and hence limit the loonie's path to attain and sustain parity."