The Canadian dollar is holding its impressive gains and trading near its highest level since July against the US dollar and near its highest level since 2017 against the euro (see price graph above). The loonie’s strength is primarily due to surging oil prices. As Canadians were enjoying their Thanksgiving holiday yesterday, WTI (the North American reference price of oil) moved over 80 USD for the first time in seven years, and remains at that level this morning. Oil is now up about 60% in 2021, with most of the move coming in the last month as shortages of natural gas are triggering a need for alternative power generation fuels such as oil ahead of the winter months in the Northern Hemisphere. So far, OPEC has not been willing to increase supply to alleviate the price pressure. The Canadian dollar’s move up against USD is especially notable because it comes as the US dollar has been rallying against most other currencies. In fact, the dollar index, which measures the greenback against a basket of other majors, remains near a one-year high. The rally in the US currency comes as fears of inflation continue to feed the minority sentiment that the Fed will have to move more aggressively than currently anticipated to rein in monetary policy. As if to emphasize the point, the International Monetary Fund put out a report that was less sanguine about inflation than the US and Canadian central banks and warned that monetary authorities should be prepared to act quickly if inflation turns out not be transitory. We continue to think that the rally in oil will stabilize sooner than later but the larger macro picture of rising yields will remain with us for a while. As such, we think that the more likely scenario is that the Canadian dollar gives up some of its recent gains in the near future. USD to CAD is currently at 1.246 (CAD to USD is at 0.802).
