The Canadian dollar has been languishing in the shadow of a stronger greenback recently, but according to analysts, better days are ahead for Canada’s economy and its currency.

The loonie has been bumping along at about the 71 U.S. cent mark, a four-month low, since late September, but analysts with BofA Global Research see two catalysts that could turn that tide.

They reckon the Canadian dollar will move higher in the weeks to come to hit 73.52 U.S. cents by year end. A Reuters poll of currency strategists shared that forecast and put the loonie even higher at 74 U.S. cents within 12 months.

Canada’s stellar stock market performance is one reason why Bank of America is bullish on the loonie. Not only has the TSX outperformed U.S. markets this year, it’s also beat the rest of the world.

True, the market seems out of step with Canada’s weaker economy, but BofA analyst Howard Du sees two reasons for the disconnect. The TSX rally has been driven mainly by precious metal miners in the materials sector, and Canada’s equity market represents a smaller share of the economy than its counterpart in the United States.

Despite that, Du said the stock market’s outperformance should eventually lend support to the economy’s recovery. More than 75 per cent of the time over the past 50 years, a rally of 20 per cent or more in the TSX was followed by above average economic growth, he said.

The federal budget to be tabled Nov. 4 could serve as another tailwind for the loonie.

Bank of American believes that unlike some other advanced economies, Canada can afford to boost its fiscal stimulus without “attracting the attention of global bond vigilantes.”

“Latest levels of long-dated government bond yields, central government debt to GDP ratios, interest payment obligations, and overall budget deficits would all suggest Canada’s fiscal situation is not in the same league as the U.S., U.K., or France that have faced negative fiscal shocks this year,” wrote Du.

The analysts believe that a sizeable fiscal expansion plan will be announced on Nov. 4 and it will serve as a catalyst for a higher loonie against the U.S. dollar.

There are risks to their forecast. A global risk-off shock that extends the U.S. dollar’s rally could knock the loonie off course. Another risk would be deeper cuts to interest rates by the

Bank of Canada . BofA expects Canada’s central bank to cut its rate to 2 per cent, but if tariff tensions flare up or the economy remains weak it may have to cut deeper. This would widen the gap between rates in Canada and the U.S. and put pressure on the Canadian dollar, they said.

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Canada’s housing market recovery remains “uneven and fragile” heading into the fall season, say economists.

While September data from local real estate boards show improvements in Winnipeg, Regina, and Toronto, home sales fell in other major markets such as Calgary, Vancouver, Montreal and Halifax, said Robert Hogue,

Royal Bank of Canada assistant chief economist. “Purchasing urgency remains largely absent despite growing confidence among buyers as worst-case economic scenarios appear more unlikely,” he said.

Buyers are getting more choice in Ontario, British Columbia, and parts of Alberta, but may be holding out for even lower prices.

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McLister on mortgages

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Today’s Posthaste was written by Pamela Heaven with additional reporting from Financial Post staff, The Canadian Press and Bloomberg.

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