Perhaps the strongest signal that the recession is over is the fact that the appreciation of the CAD is making headlines, just as it did in the last expansion. But since we're operating at the interest rate lower bound, things are a bit trickier this time around.
In the short term, there is a good argument for intervening in the forex markets to slow the appreciation of the CAD. Core inflation is already below the 2% target, and if the CAD starts trading at par with the USD, Canadian retailers will start feeling obliged to cut the prices of goods for which the gap between Canadian and US prices are egregiously large. This will drag inflation even further below the Bank's target.
In the previous expansion, the Bank could deal with this issue by keeping interest rates lower than they would have been if the CAD were not appreciating. But since the Bank can't reduce interest rates below zero, direct intervention is the only remaining instrument. It should be noted that the Bank has made it very clear that this form of quantitative easing is very much on the table, so markets shouldn't be surprised if the Bank decides to use it.
But this is only an argument for the short term, while inflation remains below the 2% target. In the longer term, interest rates will start to rise (some mortgage rates have already started to increase) as we recover from the recession. If our terms of trade continue to improve, the CAD will continue to appreciate, and the Bank will be able to respond by increasing interest rates more slowly.
Worthwhile Canadian Initiative 
Did you see the Toronto Star article yesterday saying the rising C$ will force the bank of Canada to RAISE interest rates to contain it? Does this make any sense?
This may be a dumb question, but why does the bank use interest rates as its main mechanism rather than foreign currency intervention? You suggest the Bank is only considering entering forex markets because interest rates are prohibitively low to be manouvered, but if they weren’t, why would interest rates be preferred to forex intervention?
If you want to raise price inflation, lower the CAD, and probably raise interest rates, what should be done?
Brett: I think the story is that people are expecting the Bank of Canada to increase interest rates before the Fed does, so people are switching from the USD to the CAD in order to take advantage of that differential.
David: That’s actually a very good question, and one that the Bank has been wrestling with for a very, very long time. After the Second World War, Canada was an original signatory to the Bretton Woods framework of fixed exchange rates. But it soon turned out that what with the movements in in commodity prices (nothing much ever changes, does it?) they couldn’t figure out what the fixed rate should be, so they floated it. This was a remarkably radical notion at the time, and only Canada had a floating exchange rate in the 1950’s.
In the 1980’s, they tried targeting M1, but it soon became apparent that the hitherto-stable relationship between M1 and prices disappeared when it became a fulcrum for policy.
By the 1990’s, the Bank had pretty much decided that they couldn’t really fine-tune monetary policy; all they really had was a hammer. They could bang interest rates up or down, and that’s what they’ve been doing ever since.
@ Stephen: That would make sense, but the article has it the other way round: “The Canadian dollar extended gains to hit a new one-year high against the U.S. dollar on Monday, fanning speculation the Bank of Canada may be forced to raise rates sooner than expected.”
Yikes. That’s just wrong.
Direct intervention isn’t the only remaining instrument. The Bank could repeat and put more emphasis on its conditional commitment, or even extend it beyond June 30. Presumably, to be credible it would have to show that it believes that a CAD close to parity would delay the return of inflation to target beyond the usual 18 month horizon. And it may have to be aggressive in its remaining liquidity facility, auctioning off more Term PRA at the six to nine month maturity.
Yes, it makes intuitive sense that as the markets recover and people shake off their fear, that money will flow out of the safe haven, USA, into places with lots of things in demand, like gold, oil, etc.
Presumably once this bubble-territory bull market in stocks and commodities corrects, the Canadian dollar will re-adjust downwards.
In the meantime, the Bank of Canada has to be very careful not to fuel asset bubbles. Or, at second best, try to fan many different asset bubbles at once.