RBC Financial Group economists say recent data suggests that the Canadian dollar and interest rates will continue to climb.

“The absence of North American data releases today will allow currency markets to focus on the implications of last week’s unambiguously strong Canadian data releases,” says RBC. “April retail sales, manufacturing shipments and international trade figures all suggest that second-quarter real GDP growth will be nearly as strong as the first quarter’s 6.0%. Canada’s economy is clearly set to outperform its southern neighbor’s this year, a fact reflected in the Bank of Canada’s early moves this year to hike rates in an effort to bring monetary conditions closer to a neutral stance.”

RBC suggests that the divergence in monetary policy between Canada and the U.S. is expected to drive the overnight interest rate to a seven-year high relative to the Fed funds’ rate later this year. “Not surprisingly, the Canadian dollar has already jumped up sharply and is trading at 65.9¢ this morning, a 4.9% appreciation since the beginning of this year,” it says, noting that other major world currencies have also joined the party.

“The large funding gap resulting from the massive U.S. current account deficit failed to put any undue pressure on the U.S. dollar in the last business cycle. Foreign capital was easily attracted to fund the gap as the U.S. economy kept generating above-average returns on invested capital, a fact that is now quickly fading with the U.S. losing its status as the world leader in the growth arena.”

RBC says that the growth fundamentals have turned favourable for the Canadian dollar at the precise time when the fundamentals underpinning the U.S. dollar are starting to crumble. “Some consideration to hedging the risks associated with a Canadian dollar appreciation is warranted at this juncture. We expect the Canadian dollar to appreciate to 68¢ by year-end and 70¢ by the end of next year.”