World’s Best Currency Seen Moving Higher Amid BOC Tapering Calls

The Canadian dollar is outperforming all of its major peers this year, and several analysts see room for more gains as the economic recovery picks up, bolstering speculation about reduced stimulus.

Data showing stronger-than-expected job growth in February provided the impetus for the loonie to climb to a three-year high on Friday, even as the U.S. currency rose against the majority of its global peers on the back of surging Treasury yields. The Canadian dollar has eked out an advance of about 2% so far in 2021, the most among 31 major currencies tracked by Bloomberg against the greenback.

Strategists see the potential for more gains as a stronger economy makes it more likely that the Bank of Canada will taper its asset purchases. While the central bank maintained its policy rate this month and signaled it won’t change it until 2023, bets on a stimulus reduction have grown.

The Bank of Canada might “feel the pressure” to deliver tapering at its April decision, analysts at ING Bank NV including Chris Turner wrote. “Signs of materially rising inflation may see investors starting to doubt the BOC 2023 forward guidance, and possibly add some pressure to Canadian front-end rates. All this may help the Canadian dollar weather some fresh USD strength.”

World’s Best Currency Seen Moving Higher Amid BOC Tapering Calls

Amid Friday’s price surge, TD Securities exited its short New Zealand dollar versus loonie trade, with a profit of 2.48%. It still favors the Canadian dollar on the crosses and remains short the euro versus the loonie.

For Erik Nelson, a strategist at Wells Fargo, there’s been a recovery in risk sentiment, which is a “key factor of support” for the Canadian currency. He expects it to continue outperforming against most of its Group-of-10 peers.

Read: Loonie’s Surprise Move May See It Breach 1.20, Scotiabank Says

The loonie has also been far less susceptible to rising U.S. yields because Canadian rates still hold a premium to their American counterparts through the intermediate part of the curve, Scotiabank strategists Shaun Osborne and Juan Manuel Herrera wrote in a Friday note. The 10-year spread remains in favor of the dollar, but the gap has tightened.

This dynamic means that the U.S.-Canadian dollar exchange rate could “come under additional pressure,” said Bipan Rai, head of foreign-exchange strategy at the Canadian Imperial Bank of Commerce. Crude prices also remain “somewhat firm,” providing another tailwind for the Canadian currency.

The Federal Reserve’s policy decision on March 17 may present a risk to the upbeat outlook for the loonie. Should the Fed bring forward its expected liftoff timeline, that would spark a selloff in rates, supporting the dollar against most currencies, Rai said.

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