Canada's dollar will remain at lofty levels for the remainder of the year and climb further in 2013 as commodity prices remain firm and investors continue to pile money into Canadian assets due do its relatively better financial standing among global peers.
The currency is expected to hit US$1.05 by the end of next year, Royal Bank of Canada says in its latest outlook. Midday on Monday the currency was trading at around $1.02.
Another key factor that should help the loonie higher in 2013 is the difference in interest rate levels between Canada and the United States, said Craig Wright, the bank's chief economist.
"As we move forward over the longer term that interest rate differential story -- Bank of Canada tightening relative to most other central banks, at least relative to the Fed -- we think that will give the Canadian dollar a bit of an extra lift," said Wright in a conference call.
Higher interest rates often attract investment into a country, which helps its currency rise.
Nick Chamie, global head of foreign exchange strategy and emerging markets research, added the currency will also likely be supported by the rising trend of the Canadian dollar being used as a reserve currency by global central banks.
RBC sees the currency at US$1.01 at the end of 2012 and $1.05 by the end of next year, before softening a tad to cap 2014 at $1.04.
Key risks to that outlook include the U.S. fiscal cliff, a term coined to refer to tax increases and spending cuts that would take place in the new year, and the health of Europe's economy.
However, the bank said "the probability that the policies that are currently on the books will be enacted as being significantly below 50 per cent." Instead, RBC expects a much smaller degree of fiscal restraint than a full-blown cliff would entail, it said.
RBC predicts Canadian growth will pick up to 2.4 per cent next year -- above consensus of roughly 2 per cent -- and expand to 2.8 per cent in 2014.