The big news this week is that the Canadian dollar is at a one year high as it closes in on $1.03 U.S.. I thought it might be educational to look at this topic from a few different angles to see if we could get a better understanding of why our dollar is going up and if, in fact, it’s even a good thing.
With all the problems in Europe right now, Canada is increasingly viewed as a safe haven currency. People in other countries that are worried that their currency may lose value are buying Canadian dollars and gold in order to protect the money they have saved. This is the reason both the Canadian dollar and gold have gone up recently. Popularity!
Interest rates are basically the cost of renting money. If you went to rent a car and one car cost more to rent than the other, you could pretty easily figure out which car was worth more money. The same is true for currency. The Bank of Canada has indicated that it is planning to raise interest rates soon. The fact that interest rates are set to raise in Canada has added upward pressure to our dollar.
At the same time we are raising interest rates, the U.S. Federal Reserve is expected to announce more stimulus measures on Thursday. Usually this means printing more money and buying U.S. bonds in an effort to boost financial markets. The problem is, every time you print more money, you reduce the value of each outstanding dollar because there are then more in circulation.
Canada raising interest rates + America printing more money = Loonie goes up.
A high Canadian dollar is not always a good thing for our economy though. Here are some recent comments by Sal Guatieri, senior economist at BMO Capital Markets.
“There’s no doubt a strong Canadian dollar poses challenges to Canadian retailers, especially given the growing trend of Canadians to shop abroad. Similar to the impact on many retailers, Canadian manufacturers are being challenged by the strong Canadian dollar. Overall there tends to be negative impact on our manufacturing sector and of course, our overall trade position as we’re seeing with our current account deficit running more than 3 per cent of GDP, so that represents a drag on our economic performance.”
Now you know a little more about our dollar and why the value tends to rise and fall.