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The Bank of Canada has expressed concern about the strong dollar hurting exports, but soaring demand for commodities and a looming rebound in consumer spending are seen limiting the impact, economists said.

Governor Tiff Macklem said last week that a much stronger Canadian dollar could strain exports, but his comments were more nuanced than earlier warnings, suggesting the bank is unlikely to act, barring a sharp uptick in speculative demand.

“At the moment he doesn’t seem to be in any rush to talk it down,” said Royce Mendes, senior economist at CIBC Capital Markets. The Canadian dollar has surged nearly 6% so far this year and on Tuesday touched a 6-year high of about 1.20 to the U.S. dollar, or 83.33 U.S. cents.

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A strong loonie typically makes it tougher for Canadian exporters to compete globally and makes Canada less attractive for business investment. In its April forecasts, the Bank of Canada assumed the CAD would remain around 80 U.S. cents and said a stronger loonie could hit export projections.

Countering that is the sheer volume of demand for goods amid a stimulus-driven global economic recovery. Commodity prices - particularly for the metals, minerals and lumber that Canada produces - have sky-rocketed, fueled by industrial buyers and speculators.

And that is trickling down to Canadian pocketbooks.

“Incomes are higher because commodity prices are higher and we’re selling those commodities, and that sort of offsets the drag coming from non-commodity exports and business investment,” said Mendes.

With vaccinations ramping up and COVID-19 cases declining, Canada looks on track to begin reopening the hardest-hit sectors of its economy in the second half of the year, leading to a household spending boom that will further buoy the recovery.

“We are telling Canadian businesses... this is a fasten-your-seat-belts time. This is where the G-force of the economy is going to be so strong it’s going to suck you back into your seat more than you have ever seen before,” said Peter Hall, chief economist at Export Development Canada.

STRONGER YET

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The expectations of strong global growth, high commodity prices and a domestic recovery could drive the Canadian dollar higher yet, said economists. Views were mixed as to how much the potential hit to exports of a stronger currency might be offset by the benefits of cheaper imports and a dampening of inflation pressures.

Meanwhile, the Bank of Canada appears likely to keep its current guidance that rates could start rising in the second half of 2022.

“The currency is not going to be enough, in our view ... to lull them off tightening ahead the (U.S. Federal Reserve,)” said Derek Holt, head of Capital Markets Economics at Scotiabank.

But currency speculation is increasing. Data last Friday from the U.S. Commodity Futures Trading Commission showed that investors have raised their bullish bets on the Canadian dollar to the highest level since November 2019, although they remain well below the extreme levels seen in 2012 and 2017.

To counter a rise in speculative activity, the central bank could try talking the dollar down, “implying that if it doesn’t depreciate, then the central bank will delay the timing of rate hikes,” said Mendes.

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