The loonie pushed through the psychologically important 80 U.S. cent barrier in recent weeks for the first time since 2018, and analysts believe it’s next move is most likely northwards. Scotiabank analyst Hugo Ste-Marie says technical charts suggest the loonie “appears likely to reach at minimum” near US$0.82, which it is now close to doing.”.

Indeed, the loonie has surged 1.6% in recent days alone, driven by the Bank of Canada’s moves last week that surprised markets. The Bank announced a taper of its weekly net purchases of government bonds and also implied a ‘hawkish’ forward guidance on its first rate hike. With oil steady at around US$60 per barrel and likely poised to remain at these levels, there are signs the Canadian dollar could strengthen further, especially in contrast to the U.S. Federal Reserve’s dovish tone and trillions of U.S. dollar being injected into the economy.

“With the BoC sounding way more hawkish than the Fed, there’s a chance we could see the market test the Bank’s tolerance for C$ strength,” wrote Benjamin Reitzes, an economist at BMO Capital Markets, on April 26. “We’ll see if this episode looks like the post-GFC (global financial crisis) run to parity (which the BoC did little to fight) or more like the past few years of a more subdued currency (helped along by a more C$-conscious Governor Poloz).”

The Bank of Canada, which does not forecast the exchange rate in its Monetary Policy reports, assumes the loonie will hover around 80 U.S. cents, a 2 cent increase over its previous assumption in January. A stronger Canadian dollar could make exports less competitive and weigh on exports, the Bank warns, but notes that the disadvantage would likely be offset by robust demand.

“A strong U.S. recovery is projected to support robust export growth. Goods exports are expected to strengthen because of improving global demand and higher prices for a wide range of commodities,” BoC noted in its Monetary Policy report. “These positive effects are likely to substantially exceed the adverse impacts of the recent appreciation of the Canadian dollar.”

David Rosenberg also expects the Canadian dollar to firm up, noting that the currency has been on an uptrend since March 2020, and technical charts suggest the loonie’s next target is 81.63 U.S. cents and then 82.80 U.S. cents. “Overall, a constructive configuration suggesting higher highs are still possible,” Rosenberg said. 

Source: Financial Post