USD/CAD: The loonie’s highs are in the rearview mirror – RBC

The Canadian dollar went on its strongest run in more than a decade, rising to a six-year high of 83 US cents in early June. Has the loonie already reached its peak for the year? In the view of economists at RBC Economics, yes. The lift that the CAD got from rising prices from oil and other commodities may be running out of steam along with investor appetite for riskier assets.

Sentiment has shifted in favour of the US dollar and away from the loonie

“We see the loonie remaining within range of the 80 US cent level over the second half of this year and weakening slightly in 2022. Upside (higher oil prices, a persistently dovish Fed) and downside risks (less investor risk appetite) remain, so a relatively flat forecast doesn’t exclude some volatility along the way.”

“We expect oil prices to remain in their recent range into 2022, acting as neither a tailwind nor a headwind for the CAD. Meanwhile, some non-energy commodity prices have started to turn lower (lumber being one example), and could fall further as supply responds, and reopening-driven growth expectations top out.”

“We think the market is overpricing rate hikes in Canada next year, and underestimating the odds of a move by the Fed. But more convergence will be Canadian dollar-negative.”

“Investor appetite for riskier assets remains robust. But concerns that this cycle’s best growth rates (for both GDP and corporate earnings) will soon be behind us could make further stock-market gains harder to come by. Waning risk appetite could put downward pressure on the CAD.”