E An Encouraging Perspective On The Surging Canadian Dollar

“The recent surge in the Canadian dollar is unlikely to crimp Canada’s economic recovery. Similarly, the weak US dollar is a sign of an improving US economy and is also not hurting Canada’s economic recovery. Finally, the Bank of Canada’s latest projections has the Canadian economy recovering by a robust 6.5% this year and 3.7% In 2022.”   

The Canadian dollar recently traded as high as 83 cents the US as the combination of improving commodity prices and recent statements by the Bank of Canada on a possible timeline for future interest rate increases sound more hawkish than Fed statements. 

Indeed, the Bank of Canada recently reduced the pace of its purchases of government debt partly because Canada’s economic outlook improved due to the government’s rather successful pace of the vaccine rollout.

In fact, the Canadian dollar is outperforming all of its peers this year, and several analysts see room for more gains as the economic recovery picks up, bolstering some mutterings on the need to reduce the hefty Canadian government stimulus payments.

While the impact of a rising Canadian dollar on Canada’s exports has historically been seen as an economic headwind, in the current unusual circumstances (strong commodity prices, somewhat stronger oil prices, improving growth in the US economy), the strengthening Canadian dollar is simply a recognition of confidence in Canada’s ability to recover from the pandemic downturn.

The broad consensus among economists is that the recent surge in the loonie and the increased consumer costs are unlikely to shake that underlying urge of Canadians to spend their accumulated savings after the long drought associated with the pandemic.

Thus, a strengthening Canadian dollar should not prevent Canada’s economy from continuing on a fairly strong recovery trajectory. 

As the following chart illustrates, $1 Canadian dollar was worth 83 cents on May 18th while one year earlier the Canadian dollar was worth only 72 cents in the US. In other words, this represented a huge increase in the Canadian dollar relative to the US dollar.

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