One of the most important elements to forming a currency outlook is recognizing where we are in the cycle. And by that, I don’t mean the economic cycle or even where equities are headed.

Instead, I’m referring to the long-term cycles in the U.S. trade-weighted dollar. The greenback tends to rise and fall in these seven-to-nine-year phases, and those phases often dictate the direction of all other currencies.

We’ve just been through this nine-year U.S. dollar bull market where the dollar had rallied, and every other currency had faced that headwind. Now 2020 is the first year in a U.S. dollar longer-term downtrend, and that should be a tailwind for other currencies. For example, since the dollar peaked in March, nearly every other currency in the world has risen, and we have seen some currencies even rally by as much as 20%.

Now looking forward, we think that dollar weakness can continue, and we think that emerging market currencies in particular will be the main beneficiaries. Those are the ones that were hardest hit by COVID-19 and just now are starting to reclaim some of their losses.

Investor positioning there is quite light, and perhaps most importantly, economic growth in those countries is rebounding quickly. And that should underpin a big capital flow back into those emerging-market assets.

Now in terms of the Canadian dollar, we’re bullish there too. We’ve seen a decent amount of Canadian dollar strength already, but we think further gains will continue in 2021. And I think the market will start to appreciate some Canadian-specific themes, particularly Canada’s greater capacity to support economic growth with fiscal spending; the currency’s higher sensitivity to global growth, which is improving. And then once borders are reopened again, we should see a flood of new immigration, pent-up immigration that should be positive for economic growth as well.

So recognizing that not all factors are Canadian dollar-positive here, our expectations for Canadian dollar strength are muted. We’re expecting the exchange rate, on a 12-month basis, can reach 1.27, and that really equates to a 1% rally in the Canadian dollar.