On Tuesday, the remarkable recovery of the Canadian dollar passed a milestone that would have been difficult to envisage just a few months ago - 80 cents (U.S.).
The 80-cent loonie lasted for all of two hours on early Tuesday morning before succumbing to the largest intraday drop in more than one year to as low as 78.55 cents. And while that briefly reached high mark could easily be revisited in short order, the balance of probabilities suggests that a material decline in the exchange rate is the more likely outcome through the remainder of the year, according to a number of economists' forecasts.
"We think the Canadian dollar rally may be running out of steam," Bank of Nova Scotia's chief foreign exchange strategist, Shaun Osborne, said in a note.
"Fundamental, technical and seasonal factors are aligning to suggest that [the U.S. dollar] may recover some of its recent weakness."
All three of those forces have supported the loonie's strength as it ascended from a 13-year low set in the winter.
At that point, the loonie had been thoroughly weakened by the downturn in global commodity prices after the oil crash provided the final precipitous leg in the currency's descent to the 68cent mark.
What followed was an 18-percent rebound over a little more than three months that surpassed in speed all but one loonie rally of that size on record, according to BMO Nesbitt Burns.
And yet, the Canadian economy continues to be saddled by weak global commodity prices and pockets of regional recession resulting from the oil glut.
"The question is, is this an economy that's unusually strong, or unusually weak? It's still fair to say it's unusually weak, so we should have an unusually weak currency as well," said Eric Lascelles, chief economist at RBC Global Asset Management.
To be sure, Canadian economic readings have provided a steady source of positive surprises over the past few months. January gross domestic product growth released in April showed the domestic economy having its best month since mid-2013.
That capped off a three-month stretch that saw an annualized growth rate of 5 per cent, which stood in stark contrast to the portents of doom that informed sentiment toward Canada amid the commodity shock.
But it's unlikely that the Canadian economy will surpass expectations to the same extent in the months ahead, Mr. Osborne said.
Aside from the rebound of energy prices, one of the more potent forces driving the Canadian dollar higher has been diminished expectations for monetary tightening by the U.S. Federal Reserve.
After raising its key policy rate for the first time in a decade in December, the Fed has been forced to delay its tightening path by this year's flare-up of market volatility, as well as some disappointing U.S. economic data.
U.S. rate hikes are bearish for the Canadian dollar as higher yields draw capital into U.S. securities over Canadian securities.
But again, the market may have overshot in pumping up the Canadian dollar to account for Fed inaction.
The spread between Canadian and U.S. government ytw-year benchmark bond yields declined from a high of 0.60 percentage points in January to a low of 0.09 points last week.
Swap rates, meanwhile, seem to expect the Bank of Canada hiking at the same speed as the Fed over the next two years, Greg Anderson, head of foreign exchange strategy at BMO Nesbitt Burns, said in a note. "We struggle to believe that will really be the case, but that is where the market is at."
There may be further constraints looming for the loonie from seasonal factors. The recent relief rally was compounded by a powerful trend that has seen the Canadian dollar rise in the month of April in 13 of the past 16 years.
BMO credits this to similar seasonal strength in crude oil prices, as well as the transition period for Canadian tourism flows.
That trend certainly held this April, but there is no comparable May effect.
Lastly, technical indicators are starting to turn bullish for the U.S. dollar, Mr. Osborne said.
"These are classic reversal signals that usually form after extended, trending moves such as we have seen in USDCAD since mid-January," he said.
On the upside, an end to the loonie's runaway gains would bode well for Canada's recently enlivened export sector, Douglas Porter, chief economist at BMO Nesbitt Burns, said in a note.
"While there are clearly many factors that play a role in net trade, the exchange rate is a massive underlying force. And, the three-month surge in the Canadian dollar threatens to undermine those gains."