Loonie could be in for a rough ride

They argue that aggressive tightening by the U.S. Federal Reserve Board could slam the loonie down to 1.50 C$/US$ in the near future. And they expect the Bank of Canada to match the Fed with a total 75 bps in rate hikes over the coming months, if only to defend the loonie.

But CIBC suggests that uncertainty over the Bank’s moves will see the currency take a battering on foreign exchange markets.

“Moreover, C$ bulls have run out of excuses for the currency’s failure to recoup more of what it lost in 1998,” says CIBC WM, noting that commodity price increases, a hot Canadian equity market and a positive spread for 10-year bonds over Treasuries have all come about without helping the loonie.

Similarly CIBC WM foresees continued weakness in the Euro until there is some “fundamental narrowing in the gap between US and European economic performance.”