The Canadian dollar's jump to a 12-week high has threatened to break its longer-term bearish trend and worried some unhedged exporters, but strategists said the currency is unlikely to strengthen much further given the sluggish economy.
The Canadian dollar weakened against its US counterpart on Friday as lower oil prices weighed, but firm domestic retail sales data had helped push the currency to a nearly five-month high earlier in the session.
Net short Canadian dollar positions fell to 16,826 contracts in the week ended March 15 from 25,781 in the prior week. The Canadian dollar ended at C$1.3037 to the greenback, or 76.70 US cents. That was weaker than Thursday's close of C$1.2989, or 76.99 US cents. The currency's weakest level on Friday was C$1.3043, while it touched its strongest level since October 19 at C$1.2924.
The currency has rebounded nearly nine percent against the US dollar since hitting a 12-year low of C$1.4689, or 68.08 US cents, in January. Stabilising oil prices, potential fiscal stimulus and diminished Federal Reserve rate hike expectations helped fuel the move.
But currency forecasters warn that a too rapid rebound could hinder a pick-up in exports that the Bank of Canada hopes will rebalance an economy now heavily dependent on overleveraged consumers.
The Canadian dollar is trading at "very precarious" levels and the central bank may lean against further strengthening, said Mazen Issa, macro strategist at TD Securities.
The implied probability of a Bank of Canada rate cut by mid-year has dropped to 32 percent from around 60 percent a week ago as oil prices firmed and the government confirmed stimulus plans.
The unwinding of extreme short positioning has added to buying of the currency. Bearish bets by speculators against the Canadian dollar have been cut by 45 percent since reaching five-month highs in January, according to Commodity Futures Trading Commission data.
Exporters that held off hedging earlier this year are now "panicked," said Michael Goshko, corporate risk manager at Western Union Business Solutions.
But the rally may not last, given drags including a stagnant economy, said Marc Chandler, global head of currency strategy at Brown Brothers Harriman.
Canadian gross domestic product data on Tuesday is forecast to show the economy did not grow in the fourth quarter, while firm US consumer spending and an uptick in inflation have kept Fed rate hikes on the table.
"The market is too complacent on the Fed," CIBC World Markets wrote in a research note on Monday.
While many strategists saw little further near-term upside for the Canadian dollar, there is also a growing belief it has already hit its weakest level for the year.
"It will be a challenge to regain the lofty levels that we hit above C$1.45 in late January," said George Davis, chief technical strategist at RBC Capital Markets.
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