Just like last year, Canada's beloved loonie has decided it is time to head north, and is surprising everyone with how far it is willing to go.
The real question, though, is where will it choose to nest?
Last year at this time, the loonie made a dash for the US90- 91-cent range, and many forecasters were expecting it to go much higher, even to parity.
The price of oil, then over US$70 per barrel, was the main driver and many expected that it, too, would continue to rise.
With each increase in oil prices of $10 likely to add three cents to the value of the Canadian dollar, the prospect of $100 oil and a loonie flying at parity with the American greenback seemed possible.
But the price of oil fell in the wake of the slowdown in the U.S. economy, hitting a low of around $50 in January, and has spent most of its time around $60 since then.
This put the loonie's recent low of 84-85 cents well within the range predicted by EDC's exchange rate model.
But with oil still around $60, how do we account for the Canadian dollar's more recent flight above 90 cents?
One reason is that the prices of natural gas, copper, nickel and agricultural goods have also risen significantly in the past six months, adding one to two cents to the dollar's intrinsic value.
But the bigger reason has to do with expectations of global monetary policies.
With the slowdown in the U.S. economy plainly evident, it is becoming increasingly likely that the next move in U.S. rates will be down.
But with few signs so far of that slowdown touching other countries, markets appear to be convinced that policy rates will remain unchanged or even rise further elsewhere.
This is putting downward pressure on the U.S. dollar, against almost all other currencies, including Canada's.
Such economic decoupling is unlikely to persist in a world so highly integrated.
As the moderation in growth goes global, monetary policies should become more synchronized than currently built into market expectations.
Indeed, the recent appreciations of other currencies are exactly the mechanism that usually ensures slower growth in one country will be shared with others.
As interest rate expectations converge, the U.S. dollar will regain its footing and the Canadian dollar will ease back.
In the absence of those divergent interest rate expectations, the dollar would probably be at about 85 cents right now.
Monetary policy expectations probably account for another three cents or so, and the rest of the dollar's move probably reflects a degree of speculative interest, which typically contributes to exchange rate overshooting.
The bottom line?
The loonie is looking for a comfortable nest in a familiar neighbourhood.
A forward view of the fundamentals, including declines in a number of commodity prices, suggests that it will land somewhere around 83-84 cents later this year.
(Stephen Poloz is a senior vice-president and chief economist for Export Development Canada. He can be reached at spoloz@edc.ca)
