The Canadian dollar has broken above 81 cents U.S. and reached its highest level since February 2018.
The loonie has been strengthening against the U.S. dollar since the Bank of Canada revised its timeline for a potential interest rate increase. Canada’s central bank says it now sees a return to a normal inflation environment in late 2022, putting a potential interest rate hike on the table around that time.
Bank of Canada Governor Tiff Macklem had earlier signaled that the central bank would keep interest rates at their lower-bound until at least 2023. The U.S. Federal Reserve, by contrast, has indicated that an interest rate increase may not happen until 2024, at the earliest.
That divergent path created an environment for strength in the Canadian dollar.
On April 28, the U.S. Federal Reserve kept interest rates on hold, and maintained its view that “substantial further progress” is necessary before asset purchases can be scaled back. Chairman Jerome Powell emphasized that the central bank is in no rush to adjust policy.
“We’ve had one great jobs report. It’s not enough. We’re going to act on actual data, not on a forecast, and we’re just going to need to see more data. It’s no more complicated than that,” said Powell.
The Canadian dollar has rallied 3.1% against the U.S. dollar so far this year, making it the second-best performing G10 currency behind the Norwegian Krone. The loonie is also getting a lift from a rally in commodity prices and a rebound in the price of crude oil, which is now above $67 U.S. per barrel.