Rising worldwide commodity prices, rate hikes by the Bank of Canada (BOC), and increasing domestic demand have all helped support the Canadian dollar in recent months.
The Canadian dollar is considered to be one of the world’s “commodity currencies,” as it is a major exporter of a wide variety of commodities. Crude oil, natural gas, and coal comprise a large portion of Canadian commodity exports. But the country also exports agricultural products, including grains, wheat, and livestock.
Additionally, the country is a large lumber exporter and produces and exports a number of metals including gold, silver, aluminum, and copper.
(For a breakdown of the weighting of Canadian commodity exports, check out the Bank of Canada’s Commodity Price Index). “Canada has seen a rising terms of trade, as commodities have soared the past couple of years,” notes David Powell, currency analyst at Ideaglobal in New York.
A look at the Reuters Jefferies CRB Index reveals a monumental bull move from the October 2001 low at 182.83 to the February 2006 peak at 364.28 (the index has retreated slightly into mid-March). The huge worldwide rally in commodities directly boosted Canada’s economy and currency. The BOC has also been hiking rates over the past couple of years, albeit at a slower rate than the U.S. Fed. Since September 2004, the BOC nudged its overnight call rate from 2.00 percent to 3.75 percent as of early March.
Finally, solid macroeconomic factors helped to support the Canadian currency in recent years.
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