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Scotiabank has scaled back its forecasts for how much the loonie will take flight over the next year and a half.

As part of some “significant changes” to its forex forecasts released late Friday that extend well beyond the Canadian currency, Scotia now believes the loonie will close this year at 1.22 in US. dollars, or 81.96 cents US. Previously, it expected the Canadian dollar to be trading at 84.03 cents U.S. come the end of 2021.

And by the end of 2022, it now only sees the loonie at 1.25, or 80 cents US - well shy of the 82.64 cents U.S. it had been forecasting previously, and barely above the 79.61 cents it was trading at late Friday.

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A lot of Scotiabank’s rethink has to do with it now believing the U.S. dollar has further to advance against major currencies. “While we think there are still reasons to be cautious on the general outlook for the US dollar (USD), it does appear as if its broad decline has stabilized since June and structural headwinds (rising US deficits) will likely be overlooked for now,” Scotiabank’s chief forex strategist Shaun Osborne said in a note Friday. “The window for the sort of USD losses we have been expecting to play out over the balance of this year has narrowed considerably now that the Fed has set the stage for tapering asset purchases in the coming months, a message that may be reinforced at the Fed’s August Jackson Hole symposium.”

But the bank’s less bullish view on the loonie also reflects domestic developments and the currency’s inability to capture greater upside in recent weeks.

“Indeed, we no longer look for the USDCAD to push under 1.20 into H2 2020 and early 2021, per our recent forecasts. The CAD’s weakness through mid-year has run counter to positive underlying fundamentals; the CAD has had a solid opportunity to strengthen against the USD but has not been able to press its advantage. The Canadian economic recovery should pick up speed in the second half of the year and reinforce the relatively more hawkish profile of the Bank of Canada compared to the Fed through the rest of this year and into early 2022. CAD-positive yield spreads and still (generally) firm commodity prices have failed to support the CAD in recent weeks but should still provide some anchoring for the CAD through the latter part of the year, assuming market volatility eases,” Scotiabank said

“We feel there is some fundamental value in the CAD at current levels which should lift the CAD later in Q3 or in early Q4 when seasonal trends are more CAD-supportive,” he added. “But technical charts suggest that USDCAD holding major, long-term support around the 1.20 point earlier this year represents a significant turning point for the USD decline from the 1.47 peak made in early 2020 and we expect the USD to hold above the 1.20 (83.33 cents US) level moving forward.”

Scotiabank’s new forecast for the Canadian dollar puts it more in the same camp with some others on Bay Street.

Katherine Judge and Avery Shenfeld, economists at CIBC World Markets, for instance believe the market’s recalibration of U.S. rate hikes will weigh on the Canadian dollar for the rest of 2021. They expect the dollar will end the year slightly below 79 US cents.

They believe next year could bring more of the same, as Canadian economic growth and inflation lag U.S. numbers.

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“As a result, look for the Canadian dollar to continue to lose its luster through 2022 on more aggressive policy action from the Fed,” the CIBC economists said in a note earlier this month.

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