RBC Economics says Canadian dollar has ended its strongest run in more than a decade

RBC Economics says the Canadian dollar’s strongest performance in recent years is now “likely in the rearview mirror”.

A report by senior RBC economist Josh Nye states that the loonie reached its peak in June, when it hit 83 U.S. cents.

Nye described the rate as a “high-water mark for 2021”.

“After tumbling early in the pandemic, 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,” Nye wrote in a report Monday (July 19).

The bank economist went on to note that the “run-up made it the best-performing advanced-economy currency through the first five months of 2021”.

However, Nye stated that the Canadian dollar has reversed some of its previous gains.

The loonie fell below 80 U.S. cents over the past six weeks.

“We see it remaining within range of the 80 US cent level over the second half of this year and weakening slightly in 2022,” Nye wrote.

The Bank of Canada’s daily digest on Monday (July 19) indicates that a Canadian dollar is worth 78 U.S. cents.

Put in another way, it takes 1.2 Canadian dollars to buy one U.S.

In the report, Nye wrote that the U.S. Federal Reserve has signalled that it may raise rates “sooner than previously expected”.

Because of this move, “sentiment has shifted in favour of the US dollar and away from the loonie”.

Also, “The lift that the Canadian dollar got from rising prices from oil and other commodities may be running out of steam along with investor appetite for riskier assets.”

Nye recalled that the price for West Texas Intermediate, an oil standard, rose from around U.S. $40 per barrel in the second half of 2020 to more than U.S. $70.

“We expect oil prices to remain in their recent range into 2022, acting as neither a tailwind nor a headwind for the Canadian dollar,” the bank economist wrote.

Nye noted that Canadian exporters might think the Canadian dollar is “still too high”, affecting the country’s competitiveness in the international market.

However, the economist argued that the current rate is “within the range of estimates of fair value—and a long way from above-parity levels that a decade ago sparked fears of Dutch disease”.

Dutch disease refers a paradoxical phenomenon wherein the growth of one sector, particularly in natural resources, leads to an appreciation in the country’s currency, which in turn harms others, specifically manufacturing.

“If anything, labour and input shortages are likely bigger headaches for Canadian exporters,” Nye wrote.