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By Claire Sibonney and Jennifer Kwan
April 6, 2010 6:00 PM EDT
Canada's dollar strengthened to one-for-one footing with the U.S. currency on Tuesday for the first time since July 2008, powered by rising commodity prices and an economic rebound investors expect will soon trigger rate hikes.
The Canadian dollar climbed as high as C$0.9988 to the U.S. dollar, or US$1.0012, hopping the key psychological level after a string of firmer U.S. economic data helped fuel investor demand for commodity-linked currencies.
The currency has risen more than 5 percent against the U.S. dollar so far this year after gaining almost 16 percent in 2009.
The currency's rise has been supported by Canada's healthy fundamentals relative to the United States and other struggling Western economies, as well as the improving global economic outlook.
All these factors suggest the currency's strength may be more sustainable than when it last traded at par with the greenback about 20 months ago, said George Davis, chief technical strategist at RBC Capital Markets.
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"The backdrop is basically pointing to a market that is looking for growth and expansion in terms of the economic cycle. That backdrop is lending itself very well to the Canadian dollar," said Davis.
"We've had, on balance, stronger-than-expected economic data here in Canada, especially when we look at GDP, retail sales and employment, and that has a lot of people in the market more convinced that the Bank of Canada is going to act ahead of the (U.S. Federal Reserve) in terms of raising interest rates."
CONDITIONAL RATE PLEDGE TO EXPIRE
The Bank of Canada has a conditional pledge to hold the key interest rate at an all-time low of 0.25 percent until the end of June, provided inflation stays tame. But market players have begun to price in an earlier rate hike as the economy heats up after the recession.
Yields on overnight index swaps, which trade based on expectations for the Bank of Canada's key policy rate, suggest rates will have risen by at least 25 basis points by July.
At 11:37 a.m. (1537 GMT), the Canadian dollar was at C$0.9993, or US$1.0007, up from Monday's finish at C$1.0028 to the U.S. dollar, or 99.72 U.S. cents.
The unit's march higher intensified around the release of Canadian February employment data on March 12 and that's when Canadian interest rates noticeably began backing up, said Davis.
Canadian money market yields were slightly lower on Tuesday, while bond yields were higher.
"Last week's (U.S.) payrolls data just sort of reinforced the positive economic backdrop," Davis said.
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