A likely interest rate hike in July by the Bank of Canada and growing demand for Canadian investments will propel the loonie past the U.S. dollar by the summer, according to a growing chorus of economists predicting parity.

Luckily for investors, the recent rise of currency-hedged ETFs will make it much easier to maintain foreign positions in 2010 while navigating through volatile exchange rates.

Avery Shenfeld, chief economist with CIBC World Markets, was the latest economist to weigh in, saying in a report the Canadian dollar will reach US$1.02 by September, before dropping to US97¢ by year’s end.

“If as we expect, the Bank is out in front of the U.S. Federal Reserve by a couple of quarters, a higher Canadian dollar will help tighten monetary conditions,” Mr. Shenfeld said in a new strategy report.

“It’s easy to see the Canadian dollar running a few cents through parity after the first hike,” Mr. Shenfeld said.

Currency strategists such as Camilla Sutton with Scotia Capital have also been vocal in their bullishness, forecasting parity for the loonie in recent months.

And considering the loonie has been on a surge lately, it could reach parity before summer.

Since a low of US94.29¢ on Feb. 25 the loonie has roared back for a gain of more than 3¢ in the past two weeks, reaching as high as US97.86¢ on Wednesday.

Terry Shaunessy, president of Calgary-based Shaunessy Investment Counsel Inc., said he recommends clients take a 100% hedged position through ETFs when it comes to foreign investments, especially in this atmosphere.

“Really, why take the risk if you don’t have to?” he said. “In my 30 years as a portfolio manager, I’ve never seen such incredible volatility in the Canadian-U.S. dollar exchange rate that I can’t explain, so forget it. I don’t need that headache.”

He suggests ETFs such as the iShares Canadian Russell 2000 Index (TSX:XSU) or the iShares Canadian S&P 500 (XSP), both hedged under the Canadian dollar.

Another option is the BMO Nasdaq 100 Equity Hedged to CAD Index ETF.

Meanwhile Barry Schwartz, a partner at Baskin Financial Services Inc., said his firm is betting on the loonie to soar beyond parity as the United States will likely maintain a weak greenback.

“We have essentially no foreign holdings for our clients right now,” he said. “Right now if you’re going to buy a foreign stock you have to be 10% or 15% smarter because if the Canadian dollar does go up you’re in the hole.”

Baskin Financial deals only with specific equities, so Mr. Schwartz advises investors looking to protect themselves to avoid companies that have more than about 75% of their operations outside Canada.

For example, convenience store and gas-bar chain Alimentation Couche-Tard Inc. gets 78% of its revenues from the United States, he said.

Mr. Schwartz added that he would begin to consider U.S. investments if the loonie moved past 10% above parity.

On the other hand, Adrian Mastracci, president with KCM Wealth Management Inc., called hedging a double-edged sword.

“It’s the risk that brings the return,” he said. “The only time you get hit is maybe in the short term. But if you leave it, you can let it ride and take the ups and downs.”

erlam@nationalpost.com