Australia would AU$600 million ahead if it hadn''t sold gold reserves in 1997

Section:

By Jamie McGeever
Reuters
Thursday, February 9, 2006

http://ca.today.reuters.com/news/newsArticle.aspx?
type=businessNews&storyID=2006-02-
09T203345Z_01_N09241163_RTRIDST_0_BUSINESS-MARKETS-FOREX-CANADA-
COL.XML&archived=False

NEW YORK -- It might have been unthinkable only a few years ago, but
parity between the U.S. and Canadian dollars someday is not that
much of a longshot any more.

Even though the Canadian dollar has appreciated by almost 50 percent
against the greenback over the last three years, analysts say
buoyant global commodity prices, Canada's relatively favorable
economic fundamentals, and prospects of rising interest rates
suggest there's room for even more upside.

Further gains of only around 15 percent from current levels would
put the U.S. dollar at C$1 for the first time ever.

"We will get there," said David Durrant, chief strategist at Julius
Baer Investment Management, LLC, in New York.

"We would think that's in the cards. Will it be in six, 12, 18 or 24
months? The timeframe's all that's missing ... (but) that's where
we're going," he said.

The U.S. dollar fell to a 14-year low of C$1.1367 at the end of
January. On Thursday it was trading around C$1.1450, while the
Canadian dollar rose to its highest level against sterling in 12
years.

Durrant estimates that in real terms, on a purchasing power parity
basis, the U.S. dollar was probably worth approximately C$1 around
the time its nominal exchange rate traded at the record low of
C$1.12 in December 1991.

Durrant reckons Canada's terms of trade, with oil, metals, and
commodity prices still strong -- this week's selloff in these asset
classes notwithstanding -- will continue to provide a pillar of
support for the "loonie."

If global growth remains buoyant, demand for commodities -- and
therefore the loonie -- should also remain firm.

"If you're bullish on the global economy over the next couple of
years, you have to think the CAD is going to be a major
beneficiary," said Peter Frank, senior currency strategist at ABN
Amro in Chicago.

Frank predicts parity between the U.S. and Canadian currencies by
the fourth quarter of next year and targets the greenback at C$0.95
by the end of 2007.

"I've had that forecast for a long time and I still think it's
reasonable. It's probably going to happen," Frank said.

Traders have been betting consistently on further Canadian dollar
strength for several months now. But that positioning has not
limited the currency's gains so far, and in any case, it is not
thought to be at levels extreme enough to prompt an unwinding.

Canada is a major commodities and energy exporter. The high revenues
it has received recently have helped swell the country's trade and
current account surpluses.

The latest available data show Canada's merchandise trade surplus in
the first 11 months of last year was C$59.33 billion. Figures for
December, due on Friday, expected to show a surplus of C$6.8 billion.

Canada's budget surplus in the first half of fiscal year 2006, from
April to October, was C$9.45 billion, although C$5.3 billion of
proposed tax cuts for 2005/06 have yet to come into effect.

Canada's currency does not need to attract large amounts of foreign
capital to fund "twin" trade and budget shortfalls and prevent it
from depreciating, as the dollar does.

Indeed, Canada's broader economic health, reflected in the country's
low and falling unemployment, suggests there is scope for the Bank
of Canada to continue raising interest rates.

"The narrowing of the interest rate differential will deflect short-
term money that would otherwise flow out of Canada to the U.S.,"
said Michael Woolfolk, senior currency strategist at The Bank of New
York.

Benchmark rates currently stand at 3.5 percent, a full percentage
point below those in the United States. The Federal Reserve is
expected to stop raising rates around the middle of the year, but
most analysts expect the Band of Canada to continue through the end
of the year.

This anticipated narrowing of rates and yield spreads -- 2-year
spreads are currently around 65 basis points compared with 95 basis
points six months ago -- may lend further support to the Canadian
currency in the coming quarters.

Woolfolk's forecast is for the greenback to fall to C$1.05 by the
middle of 2007. But he wouldn't be surprised if parity is reached
before the year's out.

"This is not over yet and Canadian corporates need to start
adjusting to that reality," Woolfolk said.

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