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The Canadian dollar reached a 14-month high Friday after the Bank of Canada raised rates by a quarter-point this week.

Mark Blinc/Reuter

The loonie's surge after Canada became the first major economy to join the U.S. in tightening monetary policy has technical analysts forecasting more gains for this month's best-performing Group-of-10 currency.

The Canadian dollar reached a 14-month high Friday after the Bank of Canada raised rates by a quarter-point this week and left investors anticipating further hikes. With the latest gains, the currency has breached a series of key areas, known as Fibonacci retracement levels, which for chart-watchers points to a rally below $1.25, from about $1.2650 now. (Or, in Canadian dollar terms versus the U.S., a rally to above 80 cents from about 79 cents right now). It hasn't been that strong since May 2016.

If the technical analysts are right, it means the consensus on Wall Street is due for an adjustment. The median forecast in a Bloomberg survey is for the loonie to weaken to $1.32 (75.75 cents U.S.) by year-end.

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"The CAD outperformance trend looks like it's firmly entrenched," said Niall O'Connor, a technical analyst at JPMorgan Chase & Co. "It's a reason to buy CAD against the dollar on corrective retracements."

Key hurdle

For him, strengthening past $1.2775 was key, because it represented the 76.4 per cent retracement of the loonie's weakening from May last year, which according to Fibonacci analysis is the last hurdle before a full reversal.

The loonie has gained about 6 per cent since BOC policy makers indicated in June that the bank's next move would be to tighten, breaking the currency out of a year-long slump. Escaping that trend has set the Canadian dollar on the path toward $1.25, said Eric Viloria, a strategist at Wells Fargo Securities LLC.

"That break was a significant technical turning point," Viloria said. "We're seeing lower lows and lower highs. From a charting perspective, that's consistent with a downward trend."

Hold on

Strategists whose forecasts depend more on the outlook for the economy aren't so sure.

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Weaker oil prices, which led the central bank to cut rates in 2015, still loom over the commodity-dependent Canadian economy. There's also the prospect that subdued inflation may not be a temporary phenomenon. The market is pricing in roughly a 70 per cent chance that the bank will hike again by year-end.

"We underestimated the BOC's switch from neutral stance to rate hikes because we think there's still tremendous risks," said Thu Lan Nguyen, a foreign-exchange strategist at Commerzbank AG. "There's still this downtrend in inflation and we don't think they can be sure it's done."

The view that loonie gains may fade also has support from at least one technical indicator – the U.S.-Canada exchange rate's relative strength index. A measure of momentum, it's entered "oversold" territory by the widest margin since 2014. In that episode, the Canadian currency wound up weakening in the following months.

While Nguyen predicts the currency will weaken to C$1.30 by year-end, O'Connor and Viloria say any declines present a buying opportunity. For them, C$1.2461 is the next major resistance level. Should it break, the loonie could embark on a rally similar to the currency's 16 per cent advance from January to May of last year, according to O'Connor.

"Short-term, it's probably a bit overdone, but CAD outperformance seems likely to extend," he said.

Stephen Poloz, governor of the Bank of Canada, and Carolyn Wilkins, senior deputy governor, give a press conference in which they announce the central bank's first rate hike since 2010.
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