Why is the loonie performing so well

Why is the loonie performing so well?

The Canadian Dollar has soared to its highest exchange rate seen since 2017. On Friday, the CAD/USD exchange rate was sitting at 0.82, the pair’s 52-week range is forecasted to fluctuate between 0.70 and 0.82.

After dropping to the 0.69-mark last March, the loonie made its way back to pre-pandemic rates last November and has gained consistent momentum in 2021 due to the recent surge in commodity prices.

For months the North American currency has been backed by crude oil prices, and there are no signs of slowing down as WTI reached $65 a barrel this week, the highest level seen since the beginning of the pandemic.

Over the last year, the demand for construction has grown drastically which has caused the price of lumber to reach record highs as well. Not only has oil and lumber seen an increase; wheat, aluminum, copper, and gold have also reached the highest rates seen in years.

Economist at the Bank of Canada (BoC), Doug Porter, told CBC that “an index of commodity prices has risen by 37 per cent in the past six months…this run rivals anything we have seen in the past 50 years. ”

Along with a surge in commodity prices, “Canada’s central bank shows signs of hiking its benchmark interest rate far sooner than most other countries” which will continue to back the loonie.

During last week’s policy meeting, the BoC decided to pull back on buying bonds as the Canadian economy is hoping to need less stimulus than anticipated post-pandemic. BoC has also been “trading in financial instruments known as swaps, that bet on rate decisions” which leads economists to believe that the central bank hopes to raise rates “as many as two times by the end of next year.”

David Doyle, economist and market strategist with Macquarie Group said “meanwhile, you have the US Federal Reserve showing no inclination to go down that route.” Canada is setting the stage when it comes to increasing interest rates as many countries have not followed suit. This is attracting investors to contribute money to the economy, evidently raising the value of CAD.

Audrey Childe-Freeman, a foreign exchange strategist with Bloomberg Intelligence explains that as the currency market has reverted back “to being mainly driven by yields and growth prospects” a commodity currency like CAD could continue to see growth.

Based on the Canadian employment report that was released on Friday, analysts have been surprised at the surge in CAD. Despite ongoing challenges due to the pandemic, high commodity prices and the BoC's decision to increase interest rates will help the loonie’s growth over the coming weeks.

By Surina Nath