09/14/2017 14:32 EDT | Updated 09/15/2017 11:14 EDT

Get Ready For An 87-Cent Loonie, Scotiabank Predicts

Canada's economy is firing on all cylinders.

Mark Blinch / Reuters
Scotiabank is predicting the Canadian dollar will rise to 87 cents U.S. by the end of 2018.

With Canada's economy firing on all cylinders in recent months, analysts are busily upgrading their forecasts to a rosier outlook.

Few are rosier than Scotiabank's, however, which predicted recently that the Canadian dollar will shoot up to 87 cents U.S. by the end of 2018. It was trading at 81.9 cents U.S. as of mid-day Thursday.

"This is based on our view that Canadian interest rates will rise more rapidly than expected at present by the market," wrote Scotiabank chief economist Jean-Francois Perreault.

That will make the Canadian dollar more attractive to currency traders "amidst a continued global move away from the U.S. dollar," he added.

The Canadian dollar has gone up a solid nine cents U.S. since its recent low of 72.7 cents in May.

Expectations for the loonie's future changed rapidly in the wake of two successive interest rate hikes at the Bank of Canada in July and earlier this month, which doubled Canada's key lending rate to 1 per cent from 0.5 per cent.

But a higher dollar isn't necessarily good news for Canada's economy. While consumers could see disinflation on imported goods, a higher dollar would be a headwind to Canadian exporters.

Still, some analysts are even more optimistic about a stronger Canadian dollar ahead. Investment bank JPMorgan sees the loonie reaching 86 cents U.S. within the first three months of 2018, the Globe and Mail reports.

Other forecasts beg to differ

But that optimistic outlook is hardly a consensus position.

Capital Economics predicted in a client note Thursday that the Canadian dollar will fall to 75 cents U.S. by the end of next year.

The firm's senior Canada economist, David Madani, has a specific reason: He sees a housing correction in in the country's future, brought on in part by rising mortgage rates.

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He described the Bank of Canada's interest rate hikes as "ill-timed," and predicted the bank could "potentially" reverse itself next year and cut interest rates back to 0.5 per cent.

"The Bank of Canada's unexpectedly aggressive monetary tightening this year, which stands in stark contrast to the [U.S.] Fed's over-cautious approach, largely explains the surge in the Canadian dollar this year," Madani wrote.

"We expect that script to be turned on its head next year."

Other forecasts call for more tempered movement in the loonie going forward. The Bank of Montreal sees an 83-cent dollar by the end of 2018, barely higher than today's rate, while National Bank sees the loonie falling to 77 cents in the same time frame.

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