CIBC sees Canadian dollar slipping from parity next year

TORONTO (Reuters) - Canada’s currency will likely hover around parity with the U.S. dollar in the near term, but could weaken in early 2011 as markets realize the U.S. Federal Reserve is not “flooding the world with greenbacks,” according to CIBC World Markets.

The investment dealer arm of Canadian Imperial Bank of Commerce CM.TO forecast in a report on Wednesday that the Canadian currency would trade around parity and C$1.01 to the U.S. dollar, or 99.01 U.S. cents, for the rest of the year.

But by March 2011, it is seen weakening to C$1.07 to the U.S. dollar, or 93.46 U.S. cents.

“While the U.S. monetary base is indeed surging, broader measures of the money supply that are relevant to markets are not,” CIBC chief economist Avery Shenfeld said in the report.

He noted that the mostly likely trigger for a Canadian dollar correction “will simply be the market getting disenchanted with economic developments in the country whose currencies have been in favor.”

Looking ahead, some giveback in the recent rally in commodity prices is also seen weighing on the Canadian dollar.

Last week, a Reuters poll showed the Canadian dollar is expected remain around parity for much of the next year, supported by strong domestic fundamentals.

The Canadian dollar firmed as high as 99.80 Canadian cents to the U.S. dollar, or $1.002 on Tuesday, a level it last hit on October 14. But it weakened to close at C$1.0074, or 99.27 U.S. cents as the price of many commodities fell and the greenback rallied.

Reporting by Claire Sibonney; Editing by Jeffrey Hodgson and Rob Wilson