The Canadian dollar touched 80 cents (U.S.) on Monday, its highest point in two years, thanks to growing confidence in the Canadian economy and fading enthusiasm about U.S. President Donald Trump.
The loonie has been boosted in recent weeks by strong economic reports and rising interest rates at home. But mounting skepticism about the outlook for Trumponomics in the United States has helped as well.
The U.S. dollar index, which measures the strength of the greenback against a basket of other major currencies, has faithfully tracked Mr. Trump's popularity over the past year. It spiked from lows last summer to hit multiyear highs after the November presidential election, but has since slid with increasing urgency, especially over the past couple of months.
Investors had counted on Trumponomics to ignite vigorous economic growth but now have to deal with the reality of a paralyzed administration that is mired in scandal and thrashing for support. Unable to push through a repeal of Obamacare and faced with growing questions about his administration's ties to Russia, Mr. Trump has resorted to spewing venom, even at his own Attorney-General, Jeff Sessions.
The expanding shambles in Washington could continue to drag down the greenback compared with the loonie, especially if the Bank of Canada hikes interest rates again. It raised its policy rate earlier this month for the first time in seven years.
More likely, though, is a waiting period. Recent gains, which have propelled the loonie from below 73 cents (U.S.) in early May, amount to a big headwind for Canadian exporters because they boost the cost of Canadian goods to U.S. buyers.
David Rosenberg, chief economist at money managers Gluskin Sheff + Associates Inc., estimates that the loonie's nearly 10-per-cent climb since May is equivalent in terms of economic wallop to a nearly three-percentage-point jump in interest rates.
Given the dampening effect of a higher currency, there will be added pressure on BoC Governor Stephen Poloz to delay further rate hikes until the effects of the stronger loonie become clearer.
For now, the loonie appears close to fair value in terms of its buying power compared against the U.S. dollar, according to calculations by the Sauder School of Business at the University of British Columbia. That suggests there is little fundamental reason for the currency to continue its meteoric rise.
At the same time, Mr. Poloz appears to have considerable leeway in deciding when to raise rates.
Core inflation is ticking up, but only slowly, and the Canadian economy continues to deliver pleasant surprises. Reports on retail and manufacturing sales, as well as job creation, have exceeded expectations in recent weeks.
The International Monetary Fund added to the good cheer on Monday by raising its growth forecast for Canada to 2.5 per cent in 2017. If the IMF forecasts are correct, Canada will lead the G7 in growth this year.
Still, the Canadian dollar's climb against the U.S. dollar since January appears to owe at least as much to dwindling confidence in Washington as it does to any great exuberance about Canada.
For all the good news about Canada, the loonie has actually lost ground against the euro and the Australian dollar since the start of the year. The IMF, despite its enthusiasm about Canada's prospects this year, cut its outlook for 2018 to only 1.9-per-cent growth.
In part, the lower outlook for Canada next year reflects even more diminished expectations for the United States. The IMF now projects that Mr. Trump will deliver growth of only 2.1 in 2017, compared with the 2.3 per cent it had previously projected. In addition, it sees only 2.1-per-cent growth in 2018, down from the previous forecast of 2.5 per cent.
So long as Trumponomics remains missing in action, it seems unlikely that the greenback will quickly regain its past glory. But much depends on the U.S. Federal Reserve, which meets this week. Fed chair Janet Yellen has pointed to the need for higher rates, but has been sounding more dovish recently.
The U.S. central bank isn't expected to announce any immediate policy changes on Wednesday, but if it surprises markets and signals that further rate hikes may be delayed, the loonie could have more gains in store.