The loonie has rallied against the U.S. dollar over the past year, but it now appears to be losing steam. The Canadian dollar has been among the best performing currencies against the U.S. currency, surging nearly 10% in a 12-month period, and is up 1.6% year-to-date, buoyed by higher commodity prices. The currency also recently briefly breached the psychologically important 80-U.S.-cent barrier ( or $1.25).

But a number of Canadian bank economists believe the loonie’s run is about to end, especially as oil prices start to plateau. Oil-exporting countries led by Saudi Arabia are expected to pump more oil over the summer that would likely lead to a pullback in oil prices. “Combined with a USD that is now broadly back in favour with investors, CAD no longer looks set to appreciate, and will likely remain steady into mid-year,” Canadian Imperial Bank of Commerce economists Katherine Judge and Avery Shenfeld wrote in a note on April 9.

Bank of Montreal’s chief economist Doug Porter is also surprised by the resiliency of the Canadian dollar, given the slow vaccine rollout in Canada compared to the United States. While, Porter believes consumer resiliency and a robust industrial economy is keeping the loonie afloat, he believes the U.S. economy is set to strengthen. “But that speaks to more to upside risks for the U.S. growth outlook, and less to downside for Canada,” Porter said.

CAD is also expected to sag as Canada is in the midst of yet another lockdown in key provinces, while the U.S. is charging ahead with rapid vaccinations and looking to inject trillions of dollars into its economy. With conditions improving fast stateside and inflation fears rising, the U.S. Federal Reserve may also take a hawkish tone sooner than anticipated that would bolster the U.S. dollar. In addition, Canada’s current account deficit is also expected to widen once cross-border travel resumes, adding more pressure on the loonie.

“Some other commodity prices have been elevated by supply disruptions and could moderate even with improving global demand ahead. Look for USDCAD to trade in the 1.30-1.34 (74 U.S. cents) range next year,” the CIBC economists said.

“That level will be more constructive for exports, as the experience of the last decade suggests that Canada isn’t competitive with a sub-1.30 dollar-Canada exchange rate” Judge and Shenfeld added. Other Canadian economist echoed that sentiment, with François Dupuis, vice-president and chief economist at Desjardins Group noting that the Canadian dollar’s appreciation potential seems more limited for the next few quarters.

“The movement forecast for Canadian interest rates and commodity prices does not suggest the loonie will be able to go much above US$0.81,” Dupis said in a note in March. “In the short term, the spike in COVID-19 cases in some parts of Canada could hurt the currency.”

Source: Financial Post