An at par CAD.... Never thought I'd see the day..
But then again, there was the time when the Canadian Dollar was higher than the American Dollar...
Toronto Star-Par in sight for dollar
Donald Coxe moved to what some thought the lunatic fringe of forecasters in 2003 when he predicted publicly that the Canadian dollar would reach par with the greenback within five years.
"Not all the disdain was polite," said Coxe, Chicago-based global portfolio strategist for BMO Financial Group.
But he's getting the last laugh.
The hard-charging Canadian dollar is prompting an increasing number of mainstream thinkers to predict parity with the United States.
The dollar has been on a tear for a month, gaining nearly five cents and hitting 26-year highs.
Yesterday, it flirted with the 90-cent mark, coming within 0.02 of a cent in the early afternoon. It ended the day at 89.83 cents (U.S.), up 0.38 of a cent. In early trading Tuesday it reched 90.28 centgs (U.S.)
Coxe, who bases his forecasts on five-year outlooks, remains one step ahead of the pack.
"I changed my forecast three months ago to now say it will trade well through par."
The main story is that investors will continue to punish the U.S. dollar for the huge inflows of foreign capital the economy needs to fund ballooning trade and government budget deficits, Coxe said.
The Chinese and Japanese central banks alone have purchased $1.3 trillion (U.S.) in government Treasury bonds and mortgage-backed securities in the past four years, he added.
"There is no obvious reason why people would want to hold U.S. dollars," Coxe said.
"It also helps that Canada has a fundamentally good story of its own."
National Bank Financial saw the writing on the wall and upgraded its exchange rate forecast yesterday.
Last December it had predicted an average of 86 cents this year, and perhaps parity five years out. It now expects the loonie will reach parity with the U.S. dollar by the fall of 2007.
As Coxe argues, external factors will be the key drivers, said National Bank chief economist Clément Gignac.
"Our long-standing, secular optimism about the Canadian dollar is well known," wrote Gignac in an email to clients.
"Even if profit-taking on the currency could be seen after the nice run-up in April, we believe that the stars will align for a Canadian dollar at par with the U.S. dollar well before our initial target of 2010."
Though global imbalances will cause the greenback to weaken further — foreign investors are sending $2.5 billion (U.S.) a day to the United States — Canada offers a safe haven.
Exporters, which have been raising their productivity through both heavy investments in new machinery and equipment and by trimming payrolls, may be losing sleep at the thought of a dollar at par.
But firms are coping quite well, Gignac said, citing a recent KPMG survey that claims, even with an 85-cent loonie, domestic businesses have the lowest operating costs among the G-7 industrial countries and that the exchange rate would need to hit 98 cents for costs to be as expensive as those in the United States.
Also, pre-tax corporate profits as a share of GDP hit 14.6 per cent in the final three months of 2005, an all-time high.
National Bank expects Canada's trade surplus will remain between 4 and 5 per cent of GDP, helped along by improving relations with the United States.
The biggest risk to the loonie reaching parity is a possible sharp drop in commodity prices or a recession in the United States, started possibly by a severe correction in real estate prices, Gignac said.
Canada's booming real estate market ought to benefit as the surging loonie puts downward pressure on inflation and interest rates.
