NEWS
06/27/2014 01:02 EDT | Updated 08/27/2014 05:59 EDT

Canadian dollar nears 2014 high against U.S. greenback

The Canadian dollar tested six-month highs in morning trading, but analysts say they don’t expect the loonie’s recent strength to be the new normal.

The Canadian dollar rose a fifth of a cent to 93.72 cents US in late-morning trading Friday — its fourth consecutive day trading higher following a strong inflation report last Friday. That’s its highest level since the first week of January.  

The loonie hit a 2014 low of 88.94 cents on March 20, after a steady slide down from 98 cents in September and 96 cents as recently as November.

But don’t expect the loonie to keep rising, foreign exchange experts say.

“Canadian fundamentals are not strong enough to support parity,” says Camilla Sutton, chief foreign exchange strategist at Scotiabank, in a morning note.

“Looking ahead, Bank of Canada policy, the North American growth outlook and investor sentiment will likely help to stabilize [the Canadian dollar], forcing it back into a range, trading either side of [90 cents US],” she says.

Higher oil prices, inflation fuel loonie

Sutton notes that the loonie has appreciated by five per cent since mid-March, thanks to low volatility in global financial markets, rising prices in some commodities and “continued supportive growth.”

Canada’s May inflation figures, which showed annual inflation rising at an unexpectedly high 2.3 per cent, have also boosted the loonie.

“Higher oil prices (in the wake of the Iraq crisis) and higher inflation readings (with their presumed dimming of [Bank of Canada] rate cut prospects) helped strengthen the Canadian dollar to ... the strongest level since the start of the year,” says a rate forecast from Michael Gregory, deputy chief economist with BMO Capital Markets.

“It also helped that the end-of-May release of Canadian GDP data revealed relatively stronger performance than south of the border.”

BMO forecasts that the loonie will weaken dramatically through 2015, with a U.S. dollar costing $1.15 Cdn to buy by the end of that year. That converts to an exchange rate of 87 cents US.

Weak U.S. data

It’s clear that broad weakness in the U.S. dollar is playing a major role in the Canadian dollar’s recent strength.

According to data from Bloomberg, the American currency slipped Friday to its lowest level against a basket of major currencies in seven weeks.

The greenback’s slump this week followed news that the U.S. economy contracted in the first quarter at an annual rate of 2.9 per cent.

“It’s been a bad week in terms of the data released from the U.S., which has shown that the economy’s a lot weaker than people anticipated,” Lee Hardman, a foreign-exchange strategist at Bank of Tokyo-Mitsubishi UFJ, told Bloomberg.

“That’s prompting investors to downgrade their outlook for growth this year in the U.S. and that’s leading to lower yields and a lower [U.S.] dollar.”

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