To all but the loonie, Canada's economic malaise has become increasingly apparent.
Despite recent data showing a weakening of the domestic economy relative to the United States, the Canadian dollar is still one of the best-performing currencies in the world this year.
"We can't help but wonder why," Doug Porter, chief economist at BMO Nesbitt Burns, said in a note. From trade to employment to oil to interest rates, the forces bearing down on the dollar are distinctly negative, on balance.
The signs do not suggest continued resilience. "It's awfully tough to be bullish on the currency looking through the remainder of this year," Mr. Porter said.
As bearish calls start to pile up, it may take a resurgence in the price of oil to prevent a material pullback in the value of the currency.
While the Canadian dollar might currently be stronger than economic fundamentals suggest it should be, the currency is relatively weak when considered over a longer time frame.
When the oil shock tore through the heart of Canada's resource economy, the loonie went into free fall. In the year and a half or so up to last January, the dollar dropped to 68 cents (U.S.) from almost 95 cents.
Even after the subsequent rebound, the dollar has spent most of this year well below its long-term average, trading on Monday at about 76 cents.
But the boost in demand for Canadian exports that is the main selling point of a weak currency has yet to materialize.
The country's trade deficit is running at a record rate of $40-billion (Canadian) annualized. And export volumes declined at a 20-per-cent annualized rate in the second quarter.
"The lack of traction in non-energy exports and trade more broadly has to have the central bank on alert," David Rosenberg, chief economist with Gluskin Sheff + Associates, said in his daily newsletter on Monday.
"It should be ringing alarm bells that, as competitive as the Canadian dollar has become, it simply may not be competitive enough."
The loonie's gain of more than 5 per cent on the year trails only the Japanese yen among the world's major currencies. And since setting a new 13-year low in January, the loonie is up by more than 11 per cent as oil bounced off bottom.
But why the dollar has held onto most of its gains is a bit of a mystery.
Aside from trade pressure, the employment backdrop has deteriorated, as more than 31,000 jobs were lost in July.
"Canada is one of the few countries in the industrialized world to post an increase in its unemployment rate over the past year," Mr. Porter wrote.
The U.S. unemployment rate, meanwhile, continues to decline, with payrolls this year increasing by 1.7 per cent year over year – four times the Canadian pace, Mr. Porter said.
In a broader economic context, the United States and Canada are also diverging. Strong employment and consumer readings are prompting U.S. growth forecasts to rise, while Canadian GDP appears set for a for a second-quarter contraction of 2 per cent, annualized.
"The U.S. economy's relatively superior performance contrasts with the serial disappointments delivered by Canadian growth," Shaun Osborne, Bank of Nova Scotia's chief foreign-exchange strategist, wrote in a report.
Mr. Osborne said the third quarter could see further weakness before ending the year at about current levels.
Similarly, while BMO's monthly average forecast pegs the loonie's potential low at 75 cents (U.S.) in October, "the risks look heavily skewed to an even deeper pullback at this point," Mr. Porter said.
Should the price of crude oil not rise through next year, as predicted, for example, consensus forecasts for the loonie may prove considerably overoptimistic. While the energy market has recovered considerably from the depths of the correction last winter, West Texas intermediate is now trading 17 per cent lower than it was two months ago.
As the U.S. and Canadian economies have parted ways of late, rate expectations have adjusted accordingly.
The probability of a U.S. rate increase this year now sits at close to 50 per cent, while the Bank of Canada is much more likely to cut. "The next move by either central bank will take Canadian overnight rates below those of the Fed for the first time since 2007," Mr. Porter said.
A rise in U.S. yields over Canadian would make the U.S. market relatively more attractive to investors, typically causing the U.S. dollar to rise against the loonie.
And should either central bank move become a certainty, "one could easily lop 2 cents off the listless loonie," Mr. Rosenberg said.