The Canadian dollar will end 2021 as the only major developed-market currency to advance against the US dollar, and a hawkish central bank in Ottawa will likely support the loonie even more in 2022.

Markets anticipate that the Bank of Canada will be one of the most aggressive monetary authorities in the G-10 in tightening policy next year. Traders are currently anticipating five 25-basis-point rate increases in 2022. In the latter half of 2021, the BOC's hawkish rhetoric increased as inflationary pressures became Governor Tiff Macklem's primary concern.

According to Scotiabank's Juan Manuel Herrera, the loonie's pivot should continue to help it, even against its cross-border counterpart, which it has beaten for three years in a row.

“While we see the BOC and Fed both hiking by 100bps next year, we think the BOC will hike at a faster pace through 2023,” he said. “So shorter-term rates will act as a solid support for the CAD.”

Bank of Canada rosy on rebound, sees hot inflation in near term | Reuters

A New Year's Eve rally pushed the Canadian dollar over the top in G-10 FX, making the loonie an outlier among its peers after a strong year for the greenback, which saw its largest annual gain since 2015. Aside from monetary policy, the Canadian dollar found support in commodities, with crude oil prices having their best 12-month run since 2009.

These two tailwinds have pushed the currency to 1.2667 per dollar, about 0.5% higher than where it ended in 2021. Standard Chartered's Steven Englander, head of G-10 FX research, said the bank is bullish on the loonie heading into next year.

"We expect 1.15 by the end of 2022, driven by our view that the BOC is the G-7 central bank with the strongest commitment to normalizing monetary policy, supportive commodity prices, and easing COVID concerns," he wrote in an email.