As the US dollar continues to weaken amid unprecedented fiscal and monetary measures taken by the US government and the Federal Reserve, Canada’s dollar has concurrently been on a strengthening trend since the onset of the pandemic.
However, CIBC Deputy Chief Economist Benjamin Tal raises alarm over some of the implications that could arise if the Canadian dollar continues to be pushed to new highs. “I think that the Canadian dollar has no business being where it is now, and it’s all about the general weakness of the American dollar,” he notes in an interview with Bloomberg. The Canadian dollar has been trading at nearly $0.79 since the beginning of 2021, which is the highest level against the greenback in over two years.
Indeed, a strengthening Canadian dollar could create potential problems for the country’s domestic export sector, as well as the overall economy. When the Canadian dollar’s value increases relative to other currencies, such as the US dollar, consumers are able to benefit from cheaper imports. At the same time, however, Canadian companies that export goods to the US would suffer due to the price of their goods to US consumers becoming relatively more expensive.
As a result of the possible implications that could stem from a strengthening Canadian dollar, Tal suggests that the Bank of Canada further suppresses interest rates by at least another 10 basis points. His comments contradict those made by the central bank’s governor, Tiff Macklem, who has often reiterated that the bank’s benchmark rate sits at its effective lower bound.
Throughout the pandemic, the Bank of Canada has repeatedly signalled that the key rate will remain at 0.25% until at least 2023, in order to provide an abundant financial safety net for Canada’s economic recovery. However, the central bank has also brought attention to growing concerns regarding the rate-fuelled household debt binge as a possible issue facing Canadians. Tal, though, suggests that with interest rates already being at record lows, an additional reduction would cause a further spike in household balance sheets.
Information for this briefing was found via Bloomberg. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.