Soaring C$ won't hold back Canada economy: CIBC

TORONTO Oct 15 (Reuters) - The Canadian economy will outperform the U.S. economy in 2008, despite the added pressure that a soaring Canadian dollar will put on the manufacturing sector, CIBC World Markets said on Monday.

The Canadian dollar -- known as the loonie for the bird on the back of the one dollar coin -- is set to hit US$1.05, its highest level against the U.S. dollar in nearly 50 years, according to CIBC World Markets' latest economic forecast.

"The loonie's flight is far from over," said Jeff Rubin, chief economist at CIBC World Markets. "By the end of next year, you'll get as much as a nickel back when you trade your loonies for greenbacks, the biggest premium since 1960."

While the U.S. market is expected to struggle amid a sharp downturn in the housing market, in the wake of the crisis in the subprime mortgage sector, Canada's economy is expected to remain healthy.

In the past, the Canadian economy would have quickly succumbed to U.S. weakness, but Rubin said the developing world is now driving global resource demand, making Canada less sensitive to economic fluctuations in its southern neighbor.

"A much stronger domestic economy north of the border will in turn translate into divergent monetary policies in the two countries, with the Federal Reserve Board following through with another 50 basis points of easing while the Bank of Canada remains on the sidelines," said Rubin.

"With interest rate spreads turning against the greenback, and commodity prices buoyant, the Canadian dollar should climb to a 5 percent premium against the U.S. dollar by the end of 2008."

MANUFACTURING JOBS

The strong currency combined with U.S. economic weakness has pushed manufacturing in Canada close to its lowest share of the gross domestic product in the post-war period, said CIBC.

However, the bank notes that the recent loss of almost 300,000 manufacturing jobs has been more than offset by job creation in other sectors, which has produced the lowest national unemployment rate in three decades.

In fact, once measurement differences are accounted for, Canada's jobless rate will fall to as low as the U.S. rate next year for the first time since 1982, the bank said.

The construction sector has led the hiring charge over the past five years, energized by the hot domestic housing market and a private and public sector investment boom.

Government stimulus, made possible by healthy budget surpluses, is also providing support to the labor market, with the public sector share of employment at a decade high, the report said.

($1=$0.98 Canadian)