Higher commodity prices have lifted the Canadian dollar above 80 cents U.S. for the first time since 2018.
The loonie hit its highest level since February 2018 late last week amid speculation that the global reflation trade will continue to lift commodity prices. The reflation trade, which has investors buying into industrially sensitive commodities in anticipation of an uptick in global economic activity, has pushed copper to a 10-year high and boosted West Texas Intermediate oil prices north of $63 U.S. per barrel for the first time since early 2020.
That tightening spread in bond yields appears set to continue through the medium term, with the U.S. Federal Reserve stating that the central bank plans to maintain its accommodative policy stance for the foreseeable future. That, and a shift away from the U.S. dollar, have the greenback trading near a three-year low against a basket of other global currencies, including the Canadian dollar.
While the Canadian dollar has gained 1.9% against its American counterpart so far this year, it’s not the only G10 currency that’s put in a strong performance against the U.S. dollar. The loonie is just the fifth-best performer of 2021 in the group, trailing gains made by the Australian dollar, New Zealand dollar, British Pound and Norwegian Krone.
Still, the loonie’s recent rise has caught the attention of the Bank of Canada, which has flagged a strengthening Canadian dollar as a potential drag on exports. In a recent speech, Bank of Canada Governor Tiff Macklem left the door open to further monetary policy easing if the loonie’s strength proved to be a significant impediment to achieving the central bank’s inflation-targeting mandate.
"The risk is that we see a further appreciation in the Canadian dollar... If we see further appreciation, that will become more of a headwind. That does present some downward risk to our projections," Macklem said.
