In less than two months, the Canadian dollar has wiped out nearly a year's worth of fear.
The loonie broke through the 77-cent (U.S.) mark on Thursday, extending a streak as one of the hottest currencies in the world since bottoming out in the depths of the winter sell-off.
Several interrelated sources are sustaining this run: the energy rebound, the acceleration of the manufacturing sector, U.S. dollar weakness and the Bank of Canada's apparent willingness to let the currency appreciate.
Add to all that a powerful seasonal stimulant that regularly sees the Canadian dollar strengthen in April, and the odds are good that the currency builds on its recovery, said Doug Porter, chief economist at BMO Nesbitt Burns Inc.
The federal budget next week could conceivably further strengthen the dollar, if fiscal stimulus exceeds what was originally proposed.
Finally, if the hedge funds still betting heavily against the Canadian dollar feel the need to reverse their positions, that could add another cent or two.Beyond the spring, however, the balance of forces is still weighing against the Canadian currency, Mr. Porter said. "Once you get by the seasonal bump in April, I suspect it will go through at least a modest correction through the later spring and early summer."
Exactly one year ago, the loonie dipped to an intraday low of 77.93 cents. On Thursday, it got to within 7/10ths of a penny of that mark, trading as high as 77.23 cents. Between those two bookends was a year of unprecedented volatility.
A May, 2015, peak of just under 84 cents gave way to a 19-per-cent slide over the next eight months, as the energy crash weighed on the domestic economy and global sentiment deemed the Canadian outlook to be dismal.
The currency hit a 13-year low of 68.08 cents in January, to the dismay of Canadian travellers and the delight of exporters.
Then the global energy sector finally turned a corner. The elusive production declines needed to ease a global oversupply started to at least come into forecasts, if not yet reality.
It's no coincidence that Brent crude futures hit bottom on the same day as the loonie: Jan. 20. The Canadian dollar has long been characterized as a petro-currency for its high correlation to the fluctuations in energy benchmarks.
"In recent years, it has been no contest, it has been oil prices first and foremost," Mr. Porter said.
But some credit is due to the other factors propping up the loonie recently.
Manufacturing shipments for January jumped by 2.3 per cent, surpassing economists' expectations on Wednesday by a wide margin and adding to a string of evidence that factories are responding to the loonie's fall.
"Although still early, recent data should provide some reassurance to the Bank of Canada [of] the long-awaited rotation in the driver of growth away from the energy sector," Nathan Janzen, senior economist at Royal Bank of Canada, said in a note.
Amid improving fundamentals, the Bank of Canada's policy announcement last week was seen as less dovish, as governor Stephen Poloz declined to "talk down" the loonie, as many had expected.
In contrast, the U.S. Federal Reserve backed further away from interest rate hikes on Wednesday, fuelling a sell-off in the U.S. dollar, which added further to the loonie's upside.
On Thursday, Prime Minister Justin Trudeau seemed to agree with the consensus on the fading likelihood of further Canadian monetary accommodation.
"We should be using fiscal levers a little more and not just expecting monetary policy to have to fix the challenge we're in," Mr. Trudeau said in an interview with Bloomberg television. "I think we're approaching the limit of the impact of monetary policy alone."
He added that he is "comfortable" with the Canadian dollar's current trading range.
The dollar's recent surge is a reflection that sentiment toward Canada reached lows disproportionate to the underlying economy, David Rosenberg, chief economist with Gluskin Sheff + Associates Inc., said in his daily newsletter on Thursday.
"The global press has treated Canadian housing as a horror story for four years now. At some point, reality will set in and the hedge funds short the Canadian banks and the loonie will be forced to cover."
Furthermore, the Canadian currency is about to enter a period of seasonal strength. In the past 20 years, the dollar has risen by an average of almost 2 per cent in April, and not once in the past 10 years has it been negative in that month, Mr. Porter said.
"This may be a short-lived seasonal factor, but it looks very real and has persisted for decades."
But the loonie may eventually be due for a reality check, he said. The oil recovery still looks tenuous, the Fed is likely to hike rates long before the Bank of Canada and the Canadian economy is still among the slowest of all developed countries.