The Canadian dollar may soon get a lift from the Bank of Canada, despite the central bank's own assertions to the contrary.
The Bank of Canada's official stance remains largely supportive of a weak currency. But inflation and improving economic readings could force a change of tack, according to a report from Montreal-based Pavilion Global Markets.
"This suggests that the Bank of Canada's dovish monetary policy stance is out of sync with economic fundamentals," the report said. "Pressure on the Bank of Canada to become less dovish could build faster than investors expect."
Those emerging forces should support a loonie at around $0.80 (U.S.) over the next six to nine months, the authors said. That would represent a five-cent increase over Friday's close.
On Wednesday, Bank of Canada Governor Stephen Poloz reiterated the "significant uncertainties" threatening the domestic economy. An interest rate cut remains "on the table," Mr. Poloz has also recently said.
That position is consistent with a policy to weaken the Canadian dollar, in order to facilitate the recovery of the resource sector, Pavilion said.
While oil prices globally have moved up substantially from the depths of the energy crash, the benchmark for oil sands diluted bitumen has badly lagged the main U.S. crude benchmark.
As of Friday, Western Canada Select traded at more than a $15 discount to West Texas Intermediate.
A weaker loonie can help Canadian energy producers offset some of that discrepancy, by raising the prices they receive for U.S. exports versus their operating costs denominated in Canadian dollars.
But U.S. energy production is on the rise and likely to keep crude prices range-bound, limiting the impact of the currency boost, Pavilion said.
"This highlights a key challenge facing the Bank of Canada," the report said. "While regions dependent on energy remain weak, economic conditions in the rest of the country are improving, and in fact, warrant a reduction in monetary accommodation."
Alberta's unemployment rate may be near a record high, but nationally, growth in GDP and wages is respectable, the report said. Meanwhile, inflationary pressures have begun to build in recent months.
"While we are not suggesting the Bank of Canada is under imminent pressure to tighten monetary policy ..., at the very least, the Bank of Canada can refrain from 'talking-down' the loonie."