The Canadian dollar broke above 80 cents U.S. Thursday, hitting its highest level since February 2018 amid speculation the global reflation trade will continue to lift commodity prices, driving currencies traditionally tied to the commodities complex higher.

That reflation trade, which has investors buying into industrially-sensitive commodities in anticipation of an uptick in global economic activity, has pushed copper to a 10-year high and boosted West Texas Intermediate oil prices north of US$63 per barrel for the first time since early 2020.

In a note to clients, Scotiabank Chief FX Strategist Shaun Osborne said there could be further upside for the Canadian dollar against its American counterpart if commodities extend their climb higher and the spread between Canadian and U.S. bond yields continues to narrow.

“Firmer commodities and narrower U.S./Canada yield spreads are supporting the CAD’s rise (it is no coincidence that the Bloomberg Commodity index is trading at a new cycle high today and also at its highest level since 2018). If the global reflation trade really is warming up again, we have to expect the CAD to continue to strengthen,” he said.

That tightening spread in bond yields appears set to continue through the medium term, with U.S. Federal Reserve Chair Jay Powell reiterating this week that the central bank plans to maintain its accommodative policy stance for the foreseeable future. That, and a shift away from so-called safe-haven assets like the U.S. dollar, have the greenback trading near a three-year low against a basket of other global currencies.

The loonie’s recent rise has not escaped the watchful eye of the Bank of Canada, which has flagged a strengthening Canadian dollar as a potential drag on recovery in the export economy. In a speech in January, Bank of Canada Governor Tiff Macklem left the door open to further monetary policy easing if the loonie’s strength proved to be a significant impediment to achieving the central bank’s inflation-targeting mandate.

“The risk is that we see a further appreciation in the Canadian dollar... If we see further appreciation, that will become more of a headwind. That does present some downward risk to our projections,” Macklem said.

While the Canadian dollar has gained 1.9 per cent against its American counterpart so far this year, it’s not the only G10 currency that’s put in a strong performance against the greenback. The loonie is just the fifth-best performer of 2021 in the group, trailing gains made by Australian dollar, New Zealand dollar, British Pound and Norwegian Krone.