Q: Will the Canadian dollar hit 95 cents in 2007? Might it achieve parity vis-a-vis the U.S. dollar?
A: It may hit 95 cents Canadian, though I do not think that is the most likely outcome. I suspect it will stay much lower than that.
Right now (December 2006) we're at about 86 1/2 cents, which represents an 8-month low. I wouldn't be surprised to see a bit of bounceback from that.
Barring any great changes in interest rate differentials between Canada and the United States, the exchange rate will be largely determined by the price of oil and the price of metals, in particular copper and nickel.
In the long run I expect copper prices to fall, driving the Canadian dollar down with it. Copper is used a great deal in the construction of new houses, which I expect will decline dramatically in the United States. China is a big importer of copper, so if the Chinese economy cools down (which I expect it will), copper prices should cool as well.
Right now copper is trading at about $3.00 (U.S.) a pound. RBC Dominion was forecasting copper to drop to $2.50 in 2007, but they recently revised their forecast to state that copper should stay at about $3.00 for the short-medium term. Nickel and zinc prices should also stay relatively stable. I do expect these prices to eventually fall (they are at an all-time high), but the question is "when?" Late 2007 or early 2008 looks likely, so expect to see the Canadian Dollar fall then.
Oil prices are always tricky to forecast, since there are so many political factors at work. Most forecasts I've seen suggest as the world economy, particularly the U.S. economy slows, light sweet crude prices should decline from the $62-63 (U.S.) a barrel prices they've been at, to the $58-61 range. However, a study by Morgan Stanley has shown that analysts have underpredicted the price of oil every year from 1999-2006, except one: 2001. It is quite possible, then, for the price of oil to rise from it's current level, taking the dollar up with it.
In the end, I expect the Canadian dollar to bounce between 85-90 cents U.S. for most of 2007. In the long run, the dollar should fall down to 80 cents, or possibly lower. Of course, a number of factors could change that - if China dumps their large holdings of U.S. dollar-denominated bonds on foreign exchange markets, then all bets are off.
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