The Canadian dollar may be overvalued, but it could still climb higher, according to a report from BMO Capital Markets.

BMO says that its model puts the loonie’s fair value at around 93 US cents.. While many forecasters (including BMO) expect the dollar to retreat from parity within a few years, “in the more immediate future though, the [Canadian dollar] can still fly higher,” BMO says. “Currencies have been known to deviate significantly from their [purchasing power parity] and fair values for extended periods.”

BMO expects the loonie to trade at or above parity throughout 2011 and 2012. BMO says its forecast is driven by the loonie’s exposure to commodity prices, Canada’s relatively strong fiscal position, higher interest rates in Canada than in the United States, and continued U.S. dollar weakness.

“Most models show the Canadian dollar is overvalued, but that doesn’t mean the currency can’t deviate a little further from its fundamentals. The ducks are all in row for the loonie to fly still higher,” BMO concludes.

“A series of rate hikes starting in May could lift the loonie, with the currency topping out around 103 US cents. However, considering the recent appreciation in the [Canadian dollar], our forecast may well be conservative.”

The Canadian dollar closed below parity for the first time in 2011 on Friday as traders also flocked to the perceived safe haven of the U.S. dollar, falling 0.79 of a cent to 99.89 cents US.

IE