Canadian dollar hits 82 cents for 1st time since 2017.
Commodities boom coupled by chance of higher prices lights fire under the loonie.
The Canadian dollar reached its highest level in almost four years on Thursday, buoyed by high commodity prices
The loonie was changing hands at 82.08 cents US early in the afternoon, its highest level since September 2017.
Two large patterns are combining to drive the loonie higher.
First, the strengthening outlook for the global economy coming out of COVID-19 has driven up prices for resources that Canada has a lot of.
Lumber prices have reached record highs due to a building boom, and the price of a barrel of the North American oil standard, known as West Texas Intermediate, topped $65 US this week, its highest level since the pandemic began.
The price of wheat has reached 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 exceeds everything we have seen in the past 50 years,” he said.
Booming oil prices are a blessing for Canada’s economy, which is driving up the value of the country’s currency.
Potential of higher prices
The commodity boom is happening as Canada’s central bank shows signs of raising its benchmark interest rate much earlier than most other countries.
At its policy meeting last week, the Bank of Canada said it will slow its rate of bond buying, an indication 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 can hike rates as many as two times by the end of next year.
“Meanwhile, you have the U.S. Federal Reserve showing no intention to go down that path,” said David Doyle, economist and market analyst with Macquarie Group, in an interview with CBC News.
If Canada increases 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 capital would flood into the nation, and by extension, drive up the value of the currency.
“The Canadian dollar appears to react positively to those circumstances,” Doyle said.
Audrey Childe-Freeman, a foreign exchange analyst with Bloomberg Intelligence, thinks Canada’s currency may be primed for more gains.
“In a … currency market that’s gone back to being mainly dominated by yields and growth prospects, and providing … commodity prices consolidate or push up further, we assume the loonie may continue to outperform,” she said in a recent note to clients.