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The Canadian dollar reached as high as $1.0076 US, a peak last touched in May 2008, after briefly poking through a technical support level.
Analysts noted the move to break $0.9931 to the U.S. dollar came under very thin trading conditions on the last day of a year that included the Bank of Canada's first rate hikes following the financial crisis, euro zone debt troubles, rising commodity prices, and the U.S. Federal Reserve's stimulus plans.
The gains were also made as the U.S. dollar fell broadly as investors closed their books on 2010.
The Canadian dollar's strength also coincided with a reversal in the price of oil, which surged back above $91 US a barrel as the weaker U.S. dollar and technical support stopped a bout of year-end profit taking. Other commodity-linked currencies, such as the Australian dollar -- which hit a 28-year high against the greenback -- remained in favour on expectations that Asia will extend the global recovery in 2011.
"Canada is kind of in the middle of the pack ... but you're getting that sense that, after a long year and some very shallow trading, there's this sentiment of a weaker U.S. dollar heading into year-end," said David Tulk, senior macro strategist at TD Securities.
The Canadian dollar finished at $1.0054 US, up from Thursday's close at par, which was the loonie's first finish at the one-for-one level since November 10.
"The market does appear to have some optimism built into it, just like yesterday. We've seen a bit of a breakout in terms of the dollar/Canada range that has dominated in the last few sessions ... but it's thin and it's the year-end," said Jack Spitz, managing director of foreign exchange at National Bank Financial.
Slim trading volumes ahead of the New Year's holiday brought choppy conditions for the Canadian dollar but, overall, the currency will hover around parity into 2011, analysts say.
"We're still constructive on our outlook for the Canadian dollar. All the fundamentals of support are still there and we expect further monetary policy support to come in line in the second half of 2011," said Sacha Tihanyi, currency strategist at Scotia Capital.
"We also think that it's behavior is (going to) be very much like we saw in 2010 in the sense that gains are going to be restrained and there's going to be a lot of back and forth."
Tihanyi expects the Canadian dollar will rise 4 percent from current levels, slightly less than this year's advance of 5.7 percent.
But, TD had a softer outlook for the Canadian dollar next year, citing factors such as euro zone debt risk and a forecast of a firmer greenback than what many people currently expect.
BOND YIELDS TO RISE IN 2011
Canadian government bond yields closed out the year with a modest decline in quiet trade, but analysts said the year ahead should see them climb, particularly in the second half of the 2011.
"That'll start being driven largely by anticipation that the Bank of Canada tightening. That's really the major dynamic at play," said Tulk.
He said domestic government bonds are expected to underperform U.S. Treasuries partly because the U.S. Federal Reserve is not expected to budge from current ultra-low interest rates.
Market watchers are mixed about the timing of future interest rate hikes from the Bank of Canada. Among the 12 Canadian primary dealers -- those that deal directly with the central bank to help it carry out monetary policy -- the majority forecast rate increases in the second half of the year, with a median prediction for the first hike in July.
The two-year bond rose 9 cents to yield 1.678 percent, while the 10-year bond yielded 3.117 percent. Most domestic bonds outperformed their U.S. counterparts, except in the belly of the curve.
Canadian financial markets are closed on Monday.