The Canadian dollar gained nearly a cent on Thursday, rising to its highest level of the year on signs that oil prices may be starting to stabilize.
The loonie closed at 73.85 cents US , up 0.79 of a cent after having moved consistently higher throughout the day.
The Canadian dollar has been closely linked with the price of oil in recent years, and Thursday's catalyst for the loonie's rally seemed to be growing evidence that the cratering price of oil has managed to find a floor price of around $30 US a barrel.
The price of West Texas Intermediate gained 80 cents to close at $32.95 a barrel in New York. "Correlations between WTI and the Canadian may have weakened modestly but signs that crude prices have stabilized (and might even improve a little more near-term) have boosted the loonie," Scotiabank said in a note.
After a rough start to 2016 in which the loonie at one point dropped to its lowest level in 13 years at 68 cents US, the loonie has quietly strung together a solid couple of weeks against many other world currencies through most of February, up strongly against the euro, the pound and the Mexican peso. Since mid-January, the loonie is up by about 8 per cent against the U.S. dollar — about as much as oil prices have firmed over the same timeframe.
Investors are starting to return to the loonie in part because it seems less likely that the Bank of Canada will cut rates again, since the federal government has telegraphed it plans to post huge deficits in the coming years to stimulate the economy.
That spending on infrastructure takes pressure off the central bank to cut rates again, which would have been bad news for the loonie. So at least in the short term, a lack of bad news qualifies as good news for Canada's hard-hit currency.
Add it all up and there's suddenly reason for optimism when it comes to Canada's currency.
As BMO economist Doug Porter put it: "take a less-frothy U.S. dollar, less-awful oil prices, and a Bank of Canada on hold (for now), and presto-chango and the currency is suddenly on fire."
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