The Canadian dollar is headed for parity with the U.S. dollar in the next couple of years and gold will go hit the US$800 mark, according to a new report by National Bank Financial.

“Our longstanding, secular optimism about the Canadian dollar is well known. Even if profit taking on the currency could be seen after the nice run-up in April [+4.3%, second best month on record], we believe that the stars will align for the [Canadian dollar to be] at par with the [U.S. dollar] well before our initial target of 2010,” NBF says.

“We have revised our forecast for the average U.S. dollar value of the Canadian dollar in 2006 to 90¢ [which was previously 86¢] and are introducing a forecast for 2007 of an average 97¢, with parity by fall 2007,” it adds. The last time the Canadian currency reached parity with the U.S. dollar was 1976.

NBF argues that, “After more than a decade of exchange rates below purchasing power parity [80¢ to 84¢], the current and foreseeable worldwide economic and geopolitical environment is likely to keep the Canadian dollar above its PPP value for years to come.”

The factors driving this move include: global imbalances and world currency realignment; warmer Canada-U.S. political and business relations; Canadian companies are coping better than expected with a strong loonie, the Canadian trade surplus is likely to remain high in coming years; strong public finances, and a likely divergence of Canadian and U.S. monetary policies, at least temporarily — with the U.S. Federal Reserve Board soon easing policy while the Bank of Canada continues hiking.

NBF says that a rate cut over the next 12 months to hold down the Canadian dollar appears unlikely. “With the Bank paying much more attention to all-items [rather than just core] inflation, it will allow the currency to rise as long as the Canadian economy continues to operate at or close to its long-term potential.

“We think the new minority government, in a contrast with the spending-spree spirit of the previous minority government, will lean more to a Republican-style program and sharply narrow the fiscal gap with the United States,” it adds.

Risk factors to its forecast includes weakening commodity prices. “Any significant relief of geopolitical tensions, a new technology for faster substitution away from fossil fuels, an economic crisis in emerging Asian countries – all could put at risk our forecast of a US$/Cdn$ exchange rate above PPP value,” it says.

A hard landing of the U.S. economy is also a risk, as the Canadian economy would feel a strong U.S. headwind. The Canadian dollar would eventually lose momentum as the trade surplus quickly became a huge deficit, it cautions.

Along with a strong loonie, NBF sees gold going to US$800. “Since our call on the loonie is based more on world currency realignment [a broad-based decline of the U.S. dollar], bullion can be expected to act as a haven, especially in 2007 when Fed easing is likely,” it says. “Now that our US$600-bullion target of last fall has been reached, we see bullion topping US$800 during 2007, probably testing the January 1980 record of $850.”

NBF recommends overweighting golds. It also says a strong loonie is good for retailing, telcos, cable, broadcasting and other media, real estate, and industrial machinery. Losers include resource companies that sell in US dollars, and manufacturers with labour-intensive operations in Canada.