The Loonie Looks Ready To Fly

(Financial Post)

Canada in a bit of a quandary. The strong Canadian dollar has proven to be a challenge for Canadian exports as it has made Canadian goods and services more expensive. This leaves the policy makers at the Bank of Canada between the proverbial “rock and a hard place”.

If it decides to raise interest rates aggressively and the US Federal Reserve decides that it can afford to wait to raise interest rates in the US it is likely that the Canadian dollar could be in for a prolonged period of appreciation. The implication for Canadian exports is clearly negative.

The central bank knows that it has to be mindful of preventing inflationary pressures from taking root. On the other hand, Canadian interest rates can only go so far ahead of US interest rates. If the spread between the two countries’ interest rates widens too far in Canada’s favour, then the Canadian economy could be hit with the sledge hammer combination of high interest rates, a surging Canadian dollar and by extension a slumping export sector. Read more here.