At the onset of the pandemic and the consequent market panic, the US dollar played its traditional safe-haven role and surged to the levels not seen in Canada since 2003. But then the panic receded with the introduction of extraordinary monetary and fiscal stimulus around the world and the “pandemic bull market” began to take shape. Since that time, the US dollar has not just retreated to pre-pandemic levels but also hit new lows not seen in six years. At first, the decline of the US dollar was driven by global USD weakness brought about by unseen levels of USD liquidity and the market’s general risk-on mood. But in the last few months, it has been Canadian dollar strength which has been the driving force in the USD to CAD exchange rate. In particular, stronger commodity prices, Canada’s relatively good performance in the pandemic, and the Bank of Canada’s perceived hawkishness relative to the US central bank, have all caused the Canadian dollar to be the best performing G-10 currency so far in 2021. Where do we go from here? Keep an eye on the same factors that got us here in the first place; the Bank of Canada’s policy relative to the Federal Reserve, commodity prices, and overall market sentiment. Finally, inflation will mater a lot. If it begins to consistently creep up then expect USD strength and if it is perceived as only transitory then the US dollar will weaken further. This morning, after trading down 0.5% yesterday, the Canadian dollar is up 0.2% as the markets try to stabilize.
