Over the course of the last two weeks of April, the Canadian dollar gained 3% against the US dollar and continues to trade at a multi-year high. The move is especially notable given the US dollar has been generally strong and gaining against most other G10 currencies. The upswing started when the Bank of Canada came out with a surprisingly hawkish message about the course of monetary policy on April 21st. A week later on the 28th, it was the turn of the US Federal Reserve, but it conveyed a decidedly different message from the Bank of Canada and stuck to its dovish tone. That divergence in the expected course of monetary policy in each country has made the Canadian currency more attractive. Add to that, strong oil prices and generally firm commodity prices, as well as record stock market levels reflecting the market’s overall positive sentiment, and that explains the move in the Canadian dollar. But where does USD to CAD we go from here? The overwhelming view of commentators in the market is that the Canadian dollar will continue to move up against USD. And there is good reason for holding that view. The factors that brought us here noted above are not going away. In particular, the Fed is not likely to change its tone any time soon. But there are also notable risks to the “long CAD” view. The economic recovery is healthy in both countries but probably more robust in the US in the near term because the vaccine rollout has been more successful. Oil prices could go either way from here with risk in both supply (US/Iran negotiations) and demand (India Covid situation). Also, the Bank of Canada could view the rising Loonie as a threat to economic recovery and seek to refine its messaging. On that point, an early opportunity will come this Wednesday when Governor Macklem appears before a parliamentary committee. In short, the current conditions are such that a rising Canadian dollar is justified. But that is no guarantee that those conditions will remain intact.
