The Canadian dollar soared to the highest in three years, topping 80 cents US on Thursday, following what has been a recent spurt of reflation trading in favour of commodities.
The loonie rose to just over US$0.80— the highest level since February 2018, as investors speculate that the global reflation trade will continue to push commodity prices, and the currencies related to those commodities. Growing speculation of reflation, which occurs when inflation levels and economic growth increase simultaneously, has investors purchasing industrially-sensitive commodities with the anticipation that global economic activity will cause those commodity prices to increase.
The reflation trade has already helped copper reach a 10-year high, and crude prices to rise above US$60 per barrel for the first time since beginning of 2020. Moreover, the Canadian dollar will get a further boost relative to its US counterpart if commodities push even higher, and if the spread between US and Canadian bond yields continues to diminish. The tightening spread in the bond yields will likely continue for the foreseeable future, especially after Federal Reserve Chair Jerome Powell recently reiterated the central bank’s plans to maintain its current monetary policies.
Although the Canadian dollar has risen by 1.9% relative to the greenback since the beginning of the year, it is not the only G10 currency showing a strong performance. In fact, the loonie ranks fifth in best performance against the the US dollar, trailing behind the Australian dollar, New Zealand dollar, British Pound, and the Norwegian Krone.
Information for this briefing was found via Bloomberg. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.