The Canadian dollar hit its highest level in almost four years on Thursday, buoyed by high commodity prices.
The loonie was changing hands at 82.26 cents US when stock markets closed on Thursday, its highest close since September 2017.
Two broad trends are combining to push the loonie higher.
First, the improving outlook for the global economy coming out of COVID-19 has pushed up prices for commodities that Canada has a lot of.
Lumber prices have hit record highs due to a construction boom, and the price of a barrel of the North American oil benchmark, known as West Texas Intermediate, topped $65 US this week, its highest level since the pandemic started.
The price of wheat has hit its highest price since 2013, and copper prices are at a nine-year high, too.
An index of commodity prices has risen by 37 per cent in the past six months alone Bank of Canada economist Doug Porter noted recently.
“This six-month run rivals anything we have seen in the past 50 years,” he said.
Booming commodity prices are a boon for Canada’s economy, which is pushing up the value of the country’s currency.
Potential of higher rates
That commodity boom is happening as Canada’s central bank shows signs of hiking its benchmark interest rate far sooner than most other countries.
At its policy meeting last week, the Bank of Canada said it would slow its pace of bond buying, a sign it thinks the economy may soon need less stimulus. Trading in financial instruments known as swaps, that bet on rate decisions, implies the market thinks the Bank of Canada may hike rates as many as two times by the end of next year.
“Meanwhile, you have the U.S. Federal Reserve showing no inclination to go down that route,” said David Doyle, economist and market strategist with Macquarie Group, in an interview with CBC News.
If Canada raises its rate while other countries do not, that makes Canada look more attractive for investors as a place to put their money to work. So money would pour into the country, and by extension, push up the value of the currency.
“The Canadian dollar tends to respond positively to those circumstances,” Doyle said.
Audrey Childe-Freeman, a foreign exchange strategist with Bloomberg Intelligence, thinks Canada’s currency could be poised for further gains.
“In a … currency market that’s gone back to being mainly driven by yields and growth prospects, and providing … commodity prices consolidate or push up more, we believe the loonie may continue to outperform,” she said in a recent note to clients.