Loonie on track for best quarter since 2003

Buoyed by pair of Bank of Canada rate hikes

The Canadian dollar has appreciated against the U. S. greenback by more than a nickel over the past two months, a swift and somewhat surprising climb that has put the loonie on pace for one of its best fiscal quarters ever.

The dollar was trading at 82.36 cents U.S. as of 3 p.m. ET Thursday, up 5.22 cents or 6.77 per cent since the end of June.

“The Canadian dollar has continued to push higher contrary to most expectations, ours included,” noted CIBC World Markets Ian de Verteuil and Shaz Merwat on Wednesday.

According to data from Bloomberg, the last time there was a six per cent- plus quarterly surge for the loonie was in the first quarter of 2016, when it rose 6.41 per cent to US76.9 cents. That move was actually a rebound after tumbling oil prices at the start of the year had weighed on the economy and pushed the loonie below the 70-cent mark.

The best quarter the loonie has had since returning to a floating rate in 1970 was the second quarter of 2003, when the dollar gained 8.97 per cent against the greenback to US74.25 cents. This coincided with the U.S. invasion of Iraq, which reduced the global supply of oil and boosted the commodity’s price, to the benefit of Canadian producers.

Oil price spikes also occurred during other periods of loonie strength. The Canadian dollar gained 8.32 per cent and 7.36 per cent in the second and third quarters of 2007, respectively, as the price per barrel was headi ng t oward r ecord highs. The loonie rose again after oil prices dropped and t hen spiked up again in 2009, posting 8.43 per cent and 8.68 per cent gains in the second and third quarters of that year.

But oil prices over the past year have consistently been contained in the $45 to $55 range.

This time, instead of an oil bounce, two Bank of Canada rate hikes and strong economic data have helped buoy the dollar this quarter.

The loonie could still have more ground to gain. TD Securities said Thursday that more positive economic momentum could support another Bank of Canada rate increase before the end of 2017, which could keep pushing up the loonie’s value against the U.S. dollar.

“For USD/CAD, the break of the lows off the 2012 trend line and other key technical breaks favour a near-term break below 1.20,” TD said.

Morgan Stanley said the Bank of Canada had “opened the door to further CAD appreciation in the short run,” but that the bank’s concerns about household debt and possible rate hikes from the U.S. Federal Reserve could temper the loonie’s value over the long run.

“We therefore maintain our forecast for USD/ CAD upside into 2018, though the balance of risks toward stronger CAD has clearly shifted,” the analysts wrote.

CIBC said that “the most appropriate trade” in the current climate would be into Canadian banks, as they face fewer headwinds from currency moves.

“Second, they win from yesterday’s bump in short-rates, given the limited duration of their asset books,” the analysts wrote. “Third, their capital ratios improve from a strong Canadian dollar as their US dollar risk- weighted assets fall but their capital, which is almost entirely in Canadian dollars, remains static.”

(BANKS) WIN FROM YESTERDAY’S BUMP IN SHORT-RATES.