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O, Canada, How Far Will Your Dollar Rise?

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Terry J Alcorn | iStock Exclusive | Getty Images
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The Canadian dollar has room to rise - but not because of spiking oil prices.

The Canadian dollar hit a 23-month high against the dollar earlier today. Nice - but with Canada responsible for 4% of the the world's oil supply and with oil prices on a tear, it seems a bit less impressive. Add in the fact that a number of prognosticators are anticipating an interest-rate hike within the first half of the year, and you might well ask, what's driving the loonie?

For answers and trading advice, I turned to David Watt, senior fixed-income and currency strategist at RBC Capital Markets in Toronto. He told me that the reason why oil prices are headed up is affecting how the Canadian dollar performs.

"The Canadian dollar does well when underlying demand for commodities is rising, because we'll have a positive terms-of-trade impact," he said. "When you look at oil prices driven by geopolitical uncertainty, it's less and less clear that's a net positive for Canada. If prices are going up suddenly, it could well have a negative impact because the trade backdrop might go against Canada."

The U.S. dollar isn't helping right now either, Watt said. Its lackluster performance is making the Canadian dollar look even stronger, and that will make the Bank of Canada less interested in a near-term rate increase.

Still, Watt is bullish on the Canadian dollar over the next several months, given the improving Canadian economy, the prospect of increased exports to the U.S. as the American economy strengthens, and the likelihood of a rate hike, possibly in May. Watt has a midyear target for USD/CAD of 0.96, and he told me any pullback would be a buying opportunity.

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