The intense global interest in Canada’s resource sector will drive the Canadian dollar even higher, according to a research note from David Watt of RBC Capital Markets.

In 2011, the Canadian dollar’s rally already took USD/CAD below parity (it’s currently at 0.9567).  The last time the Canadian dollar traded below parity was November 2007 -- that move was driven by Rio Tinto’s $42.3 billion all-cash bid for Alcan, the Canadian aluminum company.

When foreign companies bid for Canadian companies, they must sell foreign currencies and buy the Canadian dollar.

Now, on the back of strong emerging market recovery, the world is once again eyeing Canadian companies in the natural resources sector.

In 2011, M&A inflows in Canada already total $13.3 billion; announced and pending inflows are $25 billion, according to Bloomberg. While the M&A deals may not be all cash, they are still expected to drive up the Canadian dollar.

Watt also pointed out that foreign demand for Canadian securities are rising. In 2010, it totaled C$116.3-billion (7 percent of GDP).

The growth in these inflows to Canadian companies will add to the already positive tone for the Canadian dollar, he wrote.

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