The loonie may have been stronger last month, but real recovery for the currency looks to be further off, according to BMO Nesbitt Burns.

BMO observes in its latest currency report that, “The U.S. dollar marked time last month, holding steady against the euro, pushing higher against the yen, but weakening versus the Mexican peso and the Canadian dollar.”

It says the Canadian dollar gained ground thanks to, “persistent evidence of solid domestic demand. Despite a dismal month for the TSE 300 and sharply lower energy prices, the loonie managed to rise to its highest level since early February. Domestic economic fundamentals remain solid, short-term spreads are now positive, and foreign investors are moving back into the Canadian bond market.”

However, it notes that the loonie’s future still looks weak in the short-term. “The weak outlook for global growth is weighing on resource prices, and will act as a roadblock to a more meaningful rise in the Canadian dollar in the second half of 2001. Next year’s prospects are brighter, as global growth improves.”

It also says, “the Mexican peso is expected to lose ground amid weaker oil prices and sharply slower growth, after being the strongest currency in the world during the first half of 2001. The euro is projected to only tread water until 2002, when the physical currency finally begins to circulate.”

The yen may be in for a rough ride too, as it faces another recession. “The Japanese yen weakened significantly last month as economic reality landed with a thud. Real GDP fell in Q1 and appears headed for another decline in Q2. Industrial production dropped sharply again in May, and yet inventories are still climbing. Prime Minister Koizumi is bracing the nation for the inevitable economic pain associated with real reform, which is expected to follow the Upper House elections at the end of July.”