The Canadian dollar’s climb near parity with the U.S. greenback should hold steady into the new year but is vulnerable to a pullback before spring, notes a new report from CIBC World Markets Inc.

There are a “few more months in which the loonie could flirt with levels a bit through parity,” says CIBC’s chief economist Avery Shenfeld in a new report.

But the factors giving the loonie its strength, such as a slumping U.S. dollar and rising commodity prices, appear set for a correction in early 2011, says Shenfeld.

The “heavy wave of selling” that has weakened the U.S. dollar “reflects the mistaken view that the (U.S. Federal Reserve) is flooding the world with greenbacks and that quantitative easing is by design a way to debase the dollar by excess supply.”

Shenfeld notes that the Eurozone money supply has been growing at a similar pace to that of the U.S., while Canadian money supply has actually been on a faster trajectory. That reality suggests that the U.S. dollar selling in response to quantitative easing has been overdone, making the euro, Japanese yen and loonie vulnerable to a correction.

The outlook for commodities is much the same, says Shenfeld. “While there has been some support from decent growth indicators out of China, most of the upswing in oil, copper and, of course, gold, has been simply the mirror image of the weak dollar as quantitative easing talk took hold. If, as we expect, the winter sees a correction in the U.S. dollar’s favour, don’t be surprised if a bit of the wind is taken out of the commodity ship’s sails as well.”

Shenfeld has revised his year-end target for the loonie to 99 cents U.S. and sees it dipping to 93 cents U.S. by the spring on disappointing economic growth and a strong U.S. dollar.

IE