Why the Loonie Rally Is Coming to an End

  • Canadian dollar outperformed all major peers in the past month
  • Rally helped by bets central bank may increase rates next week

Top Forecasters Warn That Loonie's Rally Is Close to Done

The Canadian dollar’s world-beating rally is losing steam, according to the currency’s most accurate forecasters.

The loonie has gained 4 percent against the greenback over the past month, to C$1.2933, beating all 31 major global currencies tracked by Bloomberg after policy makers signaled they may raise interest rates for the first time since 2010. Still, the median estimate in a Bloomberg survey predicts a 3.5 percent weakening to C$1.34 by the end of 2017, which would be the steepest drop after New Zealand’s dollar and the Danish krone.

For some analysts, including Klarity FX Inc.’s Amo Sahota, the second most-accurate predictor of the loonie’s moves last quarter, the reasons for remaining a bear are simple: traders are wildly overestimating the Bank of Canada’s desire to raise rates next week, he says. Expectations for tightening at Wednesday’s review have surged to 89 percent, from just 4 percent a month ago, according to overnight index swap data compiled by Bloomberg.

“The market has largely run its course and we’ll probably have a summer of choppiness,” said Sahota, director of risk management at San Francisco-based Klarity FX, who predicts the Bank of Canada won’t increase rates until September, while the Canadian dollar will end 2017 at C$1.32. “Staying long in the loonie is not as clear cut as everyone thinks, it’s dangerous.”

From Best to Last

Canadian dollar is forecast to reverse its rally and end 2017 among the worst performers

Source: Bloomberg surveys

* Chart shows five best and five worst performers out of 31 major global currencies tracked by Bloomberg

The Canadian dollar appreciated to its strongest level since September this week, while its advance in June was the steepest since April 2015. Speculators pared bearish bets against the loonie by the most since 2014 from a record high at the end of May, according to the latest data from the Commodity Futures Trading Commission.

While the Bank of Canada will raise its benchmark rate to 0.75 percent from 0.5 percent next week, further increases will be limited to one, most likely in October, said Bipan Rai, Toronto-based senior foreign-exchange and macro strategist at Canadian Imperial Bank of Commerce, who came third in the Bloomberg ranking. He predicts the loonie will end 2017 around current levels.

“There could be enough juice to test the important support level of C$1.2830,” Rai said. “Beyond there it might be a little tough given how far the currency has come over such a short period of time.”

Weak Greenback

The central bank in June began talking about the prospects of raising interest rates amid strong employment and output numbers that are quickly absorbing the economy’s excess capacity. The turning point came on June 12, when Deputy Governor Carolyn Wilkins highlighted how the nation’s recovery is broadening, and a number of hawkish comments from Bank of Canada Governor Stephen Poloz followed.

The rise in the loonie has also coincided with the U.S. dollar falling to a nine-month low amid signs the nation’s economy is slowing and as political obstacles cast doubt on President Donald Trump’s reflation agenda, further boosting the appeal of currencies such as the Canadian dollar.

“Both sides of the coin spoke for an increase of the loonie,” said Dirk Chlench, a Stuttgart-based strategist at Landesbank Baden-Wuerttemberg. He was the top forecaster for the currency and among a handful of analysts who had predicted a Canadian rate increase between July to September even before the central bank’s shift. “It was not only a bet on the loonie, but also on the weak U.S. dollar.”

While his bank has since dropped coverage of the Canadian dollar, Chlench’s last forecasts, dated May 29, predict a strengthening to C$1.24 by Sept. 30. Currency forecasters are ranked by Bloomberg based on the margin of error for their calls, timing and directional accuracy.

— With assistance by Wei Lu

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