Canadian Dollar Hits 6-Year High As Inflation Rises in US

Backed by rising oil prices, the Canadian dollar strengthened against the US greenback at 82.90 US cents early on Wednesday, May 13, touching its highest level since May 2015.

The loonie’s strength was aided by a weaker US dollar, which has been hit for the past couple of months amid the US economy’s struggle against the COVID-19 crisis.

As the US economy reopened, rising demand amid supply constraints in the country saw consumer prices surge by the most in nearly 12 years last month.

The Canadian dollar, largely considered a commodity-based currency, jumped nearly six per cent against the US dollar this year due to continued robustness in some commodities.

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While commodities such as copper, grains, etc. traded at multi-year highs on Wednesday, West Texas Intermediate crude oil hovered near its record high since 2018, around US$ 66 per barrel.

The Canadian dollar’s continued strength has been evident in the past few months as it broke above 81 US cents against the US dollar in April-end, its highest level since February 2018.

 

What Is Strengthening The Loonie?

 

A range of factors have contributed to the Canadian dollar’s strength, one of the most important ones being the government’s efforts to aid the pandemic-hit economy. This provided a much-needed boost to commodities trade in the country.

While COVID-19 cases continue to rise, the Canadian economy has been recovering sooner-than-expected from the pandemic’s impact. In April, the International Monetary Fund (IMF) upgraded its growth outlook for Canada to five per cent in 2021, about 1.4 percentage points higher than its earlier forecast.

Another factor that played a role in the loonie’s strength was the Bank of Canada’s  modified timeline to hike its interest rates, which kept the currency firm as against its US counterpart. Canada plans to tighten its economy and bring interest rates back up to their pre-pandemic levels by the latter half of 2022.

However, one of the most pertinent factors behind the loonie’s strength has been the country’s commodities trade, particularly that of crude oil.

Canada is a key oil exporter to the US, which continues to import relatively high amounts of crude oil products despite its high domestic oil production, which helped strengthen the loonie against the greenback.

Stronger bond yields and overall optimism in economic recovery also played a vital role in pushing the country’s currency against the US dollar.

However, what remains to be seen is whether the loonie will continue its show of strength, aided by the robustness in the overall economy and commodity prices, against the benchmark exchange rate.

 


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