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More pain ahead for manufacturers, exporters as loonie tipped to hit parity again in ’10

TORONTO - The Canadian dollar is ending the year up a solid 13 cents US or about 16 per cent from where it started 2009 and is apparently headed again toward parity - great and terrible news, depending as always upon which side of the loonie situation you stand.

TORONTO - The Canadian dollar is ending the year up a solid 13 cents US or about 16 per cent from where it started 2009 and is apparently headed again toward parity - great and terrible news, depending as always upon which side of the loonie situation you stand.

Analysts believe that a further weakening of the U.S. dollar, rising interest rates, an improving economy and stronger commodity prices will likely see the currency reach par with its American cousin in 2010 for the first time since mid-2008.

"We think it will hit parity, I think by the third quarter of next year," said Sal Guatieri, senior economist at BMO Capital Markets, "and move slightly above, maybe a cent or two above or so."

Such a jump in the currency makes imports cheaper and is a definite plus for vacationers. But it means more pain for manufacturers and exporters trying to recover from a severe recession as their goods become more expensive and less attractive to customers in the U.S., still Canada's biggest trading partner.

The loonie took a wild ride in 2009, hitting its lows for the year in early February, the same time stock markets hit bottom. The currency dropped to 76.98 cents US at a time when investors were pricing in a full-blown depression and risk-averse investors continued to plow into the safest currency in times of stress - the U.S dollar.

"Much of this year was basically retaking the ground that was lost in a one-month period," observed David Watt, senior currency analyst at RBC Capital Markets.

Markets started to recover in early March amid signs of profitability in the U.S. banking sector and the U.S. dollar started to fall out of favour once again amid investor worry about the huge amount of debt taken on to push the country out of recession and toward a recovery.

Since then, the U.S. dollar has been on a mainly one-way trip lower, to the benefit of the loonie.

Darrell MacMullin, general manager of online payment company PayPal Canada, said he definitely sees a spike in cross-border online shopping activity when the Canadian dollar rises against the greenback.

"I would say, almost a direct correlation in the amount of consumer imports Canadians buy with PayPal in relation to where the strength of the dollar is - and we see that on a weekly basis," he said.

And by the same token, American merchants are aware of the loonie's resurgence and they're out to woo the Canadian shopper.

"We have a lot of large merchants in the U.S. who have used PayPal for many years and know it is very popular in Canada - so they come to us, saying we would love to figure out how we can be targeting Canadian customers more effectively."

He added that it doesn't matter whether the dollar is at parity or close to it - what does matter is volatility and this year swings of half a cent or more in a day were commonplace. And MacMullin said it's interesting how in tune Canadians are with those moves.

"They will see what the dollar value is the same day they're doing comparison shopping and if the dollar moves a cent in a day, that could be their decision as to whether they buy or not."

Canadians are likely taking advantage of the higher currency to fly into the U.S. WestJet Airlines, for one, says that it has seen more Canadians travelling to the U.S. and other holiday destinations. But a spokesman said it is very difficult to say how much this has to do with a higher loonie.

"There are so many different variables at play in the travel industry, including fares, seat sales, advertising, the role of travel agents, distribution systems," said Robert Palmer, the airline's manager of public relations.

"The consensus is that while our transborder traffic remains strong, it would be difficult to attribute that strength to a healthy Canadian dollar."

At the same time, it's likely fewer Canadians can afford to take advantage of the higher Canadian dollar. That is because economic conditions are so much weaker than the last time it was at parity - or even in September 2008 when the currency was perched around the 95-cent level.

Now, the Canadian economy is just crawling out of recession and unemployment is at 8.5 per cent and employment is now about 321,000 below the peak of October 2008.

The loonie's advance casts a forbidding pall over the economy, leaving the Bank of Canada to warn repeatedly this year that its strength poses a real threat to recovery. The situation leaves the central bank in a quandary, since it can't just wave a wand and persuade investors to go invest in some other country's currency.

The bank has to choose its battles and "isn't necessarily opposed to all Canadian dollar strength," said Watt.

"What it's opposed to is Canadian dollar strength like we saw in early October. A sharp move, but also moves that were driven by insanity."

He was referring to a two-week period in October where the dollar zoomed from 92.21 cents US to 97.48 cents US, around the same time the Australian central bank raised interest rates.

"People said Australia is hiking interest rates, Canada had a good September jobs number - the Bank of Canada is going to have to raise interest rates a lot sooner than they expect and so therefore you want to buy the Canadian dollar."

In that situation, the bank, in its scheduled October rate announcement, turned the tables on currency markets and announced it was leaving rates near zero until the middle of 2010.

"They were quite clear in saying, look, what the market is looking at is wrong - this is the way we think about things," said Watt.

"And you don't bring (currency markets) back to reality by obfuscating things, you bring them back by being clear and saying, this is the way we look at things and if you keep going this way, we're going to fight you."

The currency then backed off, falling two cents the next day.

On top of the dollar being buoyed by higher commodity prices, economic performance and a weaker greenback, the currency could get even more lift later in the year as the Bank of Canada moves to hike interest rates. The U.S. Federal Reserve is also widely tipped to also increase rates, although that's projected to come a couple of months later.

Guatieri adds that the dollar could even find itself a couple of cents above parity in 2011 "and floating around there for a while."

"Longer term, we don't think it will stay at parity for the reason that it's an uncompetitive level for the currency."

Guatieri sees Canada running a significant current account deficit on the order of three per cent of GDP for the next several years, which will also act as a brake on the loonie's flight.

"Ultimately that will weigh on the currency and it will have to move back down to its presumed fair value."

 
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