Canadian Dollar Extends Gains on Higher Energy Prices — Will the BoC Intervene?

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The Canadian dollar strengthened again against its US peer to close out the trading week. The loonie has been on a tear as of late, buoyed by rising energy commodities and investors turning bearish on the greenback. But policymakers are becoming concerned about the loonie’s ascent, concerned that it would hamper the economic recovery.

According to Statistics Canada, producer prices surged 14.2% year-over-year in April, up from 10% in March. The producer price index jumped to 1.7% month-over-month.

Manufacturing sales increased 3.5% in March, while wholesale sales climbed 2.8%. New motor vehicle sales climbed 173,000 in March.

Rallying crude oil prices are lifting the loonie this week. June West Texas Intermediate (WTI) crude futures surged $1.32, or 2.07%, to $65.14 per barrel on the New York Mercantile Exchange.

Since Canada maintains a current account deficit, exports remain an integral part to economic growth. Oil and gas remain the country’s top shipments, so any price change can have an impact on the loonie and the broader economy.

The Canadian bond market was mixed, with the ten-year yield down 0.013% to 1.556%. The one-year bill rose 0.025% to 0.215%, while the 30-year bond dipped 0.004% to 2.181%.

On Thursday, Bank of Canada (BoC) Governor Tiff Macklem presented his concerns about the loonie at a press conference. The central bank revealed that the institution is monitoring the Canadian dollar’s ascent to ensure that its rapid appreciation does not hurt the economic recovery.

“If it moves a lot further that could have a material impact on our outlook and it’s something we’d have to take into account in our setting of monetary policy,” he said. “If the dollar were to continue to move — particularly if its not reflecting good developments for Canada — that could become more of a headwind on our export projection.”

canadian dollarThe loonie has been monitoring the BoC’s resource prices this year, which have soared to their highest levels in seven years.

At the same time, the loonie has been benefiting from the central bank’s hawkishness. The BoC announced that it would be tapering its monthly bond purchases, although officials dismissed talk of raising interest rates.

Overall, the loonie is up nearly 5% against the US dollar.

The USD/CAD currency pair tumbled 0.32% to 1.2123, from an opening of 1.2163, at 16:34 GMT on Friday. The EUR/CAD rose 0.17% to 1.4717, from an opening of 1.4693.

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