After the loonie initially fell noticeably against the USD last week, a recovery set in, which continued on Monday despite a roller coaster ride. In view of the excessively high inflation rates, the Bank of Canada (BoC) is set to embark on a path of hiking rates, providing support to the loonie, economists at Commerzbank report.

CAD to benefit from significantly higher commodity prices

“One support for the CAD recovery is likely to be the expectation that Canada, as a commodity country, will benefit from significantly higher commodity prices. In this context, Putin's war in Ukraine and the high uncertainty fuel the expectation that the supply shortage, will continue or even worsen – with the consequence of further rising (commodity) prices.”

“Expectations of interest rate hikes are likely to provide further support for the loonie. Inflation rates, which have already shot well above the Bank of Canada's (BoC) target range, could accelerate further instead of drifting back toward the 2% target value as expected by the BoC from the second half of the year.”