It’s like the Bank of Canada wants the dollar to remain low to give a currency advantage for Canadian exporters looking to sell in the U.S. But the market sees the economy strong enough for the loonie to be caught in a tug of war.
The market currently seems to be winning the battle as the loonie was now about 75.50 U.S. cents at a point on Wednesday, up about 2 per cent from last week. Still according to the governor of the Bank of Canada, Stephen Poloz, Canadian exports earlier this week were facing challenges and that’s seen as a signal the bank doesn’t want the loonie to get too strong just yet.
The question still remains whether the bank will let it go entirely, and let the market take the Canadian dollar in a close-grained direction.
The loonie has been quite unstable this year as it changed to one of its fasted rise on record in January and began to falter by late February. It ultimately slid to a year-to-date low of 72.73 U.S. cents on May 4.
This instability of the loonie for an average Canadian, which is one who focuses on the exchange rate with an eye to timing a U.S. vacation or a cross-border shopping trip rather than playing the high stakes currency market, seems loathsomely volatile.
Andrew Grantham, a senior economist with CIBC says that is not really the case. The instability of the loonie is due to the fact it is trying to find its groove in a market that is sending out some mixed signals. “Maybe it feels like it’s been more volatile just because there hasn’t been any clear direction in the currency”, Grantham said.
The price of oil and the gap in interest rates between Canada and the U.S. are two factors that the loonie is trying to reflect. Those two forces have put a lot of downward pressure on the loonie. Oil prices haven’t been great, falling beneath US$45 on Wednesday and down more than 7 per cent this month. On the other hand, the interest rate gap is wide spreading. The U.S. Federal Reserve has added another quarter point to its target range of 1.0 to 1.25 per cent while the Bank of Canada’s policy rate has been 0.5 per cent since July 2015. But the market doesn’t focus only on what is happening now, but on previsions made by statistics from the economy data.
Canada’s economy grew at an annualized rate of 3.7 per cent during the first quarter. This shows the economy has recovered from the technical recession that followed the oil price downturn.
Grantham said CIBC now expects the Bank of Canada to raise its interest rate target in the fourth quarter.
“It does seem like the Bank of Canada is finally coming around the idea that the Canadian economy is actually in pretty good health at the moment. They don’t need these emergency low interest rates and they can start very gradually increasing them”, said Grantham.