Loonie at par by summer: economists

Interest rate increases will drive the Canadian dollar backup toparity with its U.S. counterpart by this summer, according to agrowing chorus of economists.

The latest prediction of parity came Wednesdayfrom CIBC World Markets.

Its forecast is based on the expectation thatthe Bank of Canada will hike its key lending rate in July, at least six months ahead of the first hike by the U.S. Federal Reserve.

"Indeed, we've already seen the Canadian dollar gain several cents in recent weeks as the market began to firm up expectations" of a July rate hike in Canada, says CIBC chief economist Avery Shenfeld.

The loonie was quoted at 97.48 cents US at the close of tradingWednesday. It's gained almost 3.5 cents against the greenback in the last two weeks.

CIBC's currency outlook sees the loonie rising to $1.02 US by September before slipping back to 97 cents US by the end of the year.

While the Bank of Canada's early rate hike is one of the main catalysts of the dollar's rise, it isn't the only one, CIBC says.

Rising commodity prices a factor

The investment bank also lists rising demand for commodities as a reason. It sees the dollar benefiting from rising oil, mineral and fertilizer prices as Canadian producers "repatriate profits."

Withcapital markets bouncing back,the forecast says the loonie also stands to gain becausethe rest of theworld considers Canada to have one of the "friendliest" environments to make foreign acquisitions.

"If the capital markets finally get an appetite for M&A, then Canada could be one of the first places to see the benefit of foreign inflows," says CIBC analyst Zafar Bhatti.

Fears ofdefault by a sovereign nation could also drive the dollar. "Canada is one of the few remaining AAA credits with a healthy outlook and the Canadian dollar could benefit from a switch trade out of weak sovereign names to Canada," Bhatti says.

Other banks see parity looming

CIBC isn't alone in forecasting a summer return to parity for the dollar. Scotiabank and BMO economists have both weighed in on the increasing likelihood of parity.

"With the recently released Q4 Canadian GDP data and a more hawkish sounding Bank of Canada, we feel that the case for [the Canadian and U.S. dollars] to sustainably trade to parity by the end of Q2 has strengthened," Scotiabank said in a foreign exchange note this week.

BMO economists also see parity by the summer. "We look for the loonie to trade through parity by Q3, leading the Bank [of Canada] to hike rates more cautiously," said a report by BMO Capital Markets last week.

The last time the dollar reached parity with the U.S. dollar was in 2007 and 2008, when oil prices surged as high as $147 US a barrel.