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Photographer: Brent Lewin/Bloomberg Photographer: Brent Lewin/Bloomberg

In an era of low global interest rates, currency traders will have to look elsewhere for an impetus. In Canada, they can bank on population growth.

The flood of immigrants and non-permanent residents to levels not seen in a century has been one of the main drivers supporting Canada’s economic expansion over the past several years. That has kept the Bank of Canada as an outlier in the global easing trend as it held its policy rate unchanged, bolstering the allure of the loonie.

“These high levels of immigration -- if they are to continue and help support growth -- are actually supportive of a Canadian dollar over time,” Frances Donald, chief economist at Manulife Investment Management, said in an interview in Toronto.

Canada's Newcomers New arrivals to Canada drive fastest population gains in five decades Source: Statistics Canada

The country’s population grew by 208,234 in the July to September period, or 0.6%, the fastest quarterly increase since at least 1971. Some 83% of that increase is due to international migration, according to estimates from Statistics Canada released Thursday in Ottawa. Over the past year, Canada’s population has jumped by almost 560,000, an increase of 1.5% -- that’s the fastest annual pace since 1990.

“This is the story I think markets are missing: how powerful immigration is at actually changing your financial markets, particularly your rates and FX,” Donald said.

The Canadian dollar is on pace to take the No. 1 spot among its Group-of-10 counterparts this year, strengthening by more than 3% against the U.S. dollar.

Canada’s population boom has driven robust gains in the housing and labor markets, countering the effect of an aging demographic. This has helped to avoid the Japanification trap of low growth, low inflation and low interest rates that are slowly becoming evident in other parts of the world.

“What’s fascinating about the story however, from a strategist, like myself, is not even how it relates to GDP growth but how we’re substituting one form of policy for another,” Donald said.

While Donald argues immigration can be a proxy for monetary policy, currency strategists say the central bank is still the main driver of the loonie, and immigration is more of a long-term variable that can influence policy.

“Immigration informs the output gap and hence policy stance,” wrote Mazen Issa, senior FX strategist at TD Securities in New York. “FX will react to how the Bank changes policy.”

Case in point, Bank of Canada Governor Stephen Poloz has cited the country’s robust labor force, supported by new entrants, as a reason for holding interest rates despite concerns around a slowdown. The nation’s population growth may be masking a deeper economic problem that could hamper long-term growth: over the past two years Canada’s productivity hasn’t grown at all.

Read more: Population Boom Masks Lingering Productivity Concerns in Canada

Relying on human capital to improve growth and inflation numbers over time actually acts as a curve steepener, Donald added. “If we rely on this so called human stimulus then we don’t have to rely on monetary policy to the same extent.”

— With assistance by Theophilos Argitis, Susanne Barton, and Laura Cooper

( Updates Canadian dollar’s move throughout and adds productivity details in ninth paragraph. )