The Canadian dollar has been on a tear over since the week of November 2, hitting a two-year high against the U.S. dollar on news of a coronavirus vaccine, higher oil prices and rising investor appetite for riskier currencies. The loonie paused at 1.3032 to the U.S. dollar, or 76.73 U.S. cents on November 10, reversing slightly from its strongest intra-day level in more than two years on November 9 at 1.2928, according to Reuters.

The loonie has regained all the ground it lost before the U.S. election and is trading near its pre-pandemic level of about 1.30 to the greenback, and has also appreciated against other G7 countries currencies. The domestic economy also remains well-supported.

On the other side of the ledger, the U.S. election result has also set up a weaker U.S. dollar, especially if some kind of fiscal stimulus is conjured by a divided Washington. In the days following the election the USD fell to its lowest level since early 2019 against a basket of 26 trade-weighted currencies.

National Bank economists Stéfane Marion and Kyle Dahms have seen enough and now believe that the loonie should climb from here onwards. “The better-than-expected performance of the Canadian economy, coupled with the easing of financial stress, led the Bank of Canada to recalibrate its QE asset-purchase program to $4 billion a week from $5 billion a week,” said economists Marion and Dahms. “With this backdrop and the good news on the vaccine front, we see the CAD strengthening more than previously anticipated in the months ahead. Our new target is $1.25 to the USD (or 80 U.S. cents) in 2021. That would bring the value of the CAD close to purchasing-power parity (PPP) for the first time since 2018.”

But the National Bank economists’ forecast appears to be more bullish than that of other strategists. A Reuters poll of 30 analysts earlier in November, expect the loonie to strengthen to 1.32 per U.S. dollar, or 75.76 U.S. cents, and then  climb to 1.2938 in one year, compared to 1.3000 in last month’s forecast.

“We see the Canadian dollar remaining around 1.33 over the next few months due to continued uncertainties related to the pandemic,”  Hendrix Vachon, a senior economist at Desjardins, told Reuters. “Subsequently, the international context should improve, which would favour several currencies, including the loonie.”

Source: Financial Post