Loonie Creeping Downward – Bank of Canada Denies Responsibility

Conspiracy theories are everywhere. David Parkinson who is a noted columnist with the Globe and Mail referred to a research paper that questioned the viability of the Canadian Dollar, at least as far as it being kept at parody with the United States greenback. The theory suggested that the economy in Canada would not be as robust as the recovering United States economy in the near future. The signs were there, the cooling off of the real estate market, a dip in the commodities and Canada’s dollar scaring off orders from those wanting to buy goods. It seems the economic futurists were in favor of the loonie being devalued just a bit. Economists were expecting the loonie to fall by roughly ten percent within the next year or so.

   

It seems that timeline was off just a bit. The Bank of Canada got a new Governor last October, Stephen Poloz. There was talk, hypothetically speaking, of pushing the value of the loonie down a bit to keep the economy from heading in the wrong direction. Those in the money trade call the optimal value of the loonie the purchasing power parity level, or PPP. It is the value at which Canadians don’t unduly suffer from the disparity in pricing with the US dollar. It also makes buying goods from Canada at a lower cost an appealing prospect.

That little discussion within the Bank of Canada triggered that pushing and here we are, barely four months later with the loonie down just over 10 percent when compared to its US counterpart.  And, depending on who you talk to, it was a planned move. First the Bank of Canada changed its policy language, no longer referencing the tightening bias. Second, in January the announcement was made that interest rates could go either way depending on whether Canada was looking at inflation or deflation in the short term.

It was in reality just talk, but effective talk. Such is the power of the Bank of Canada. Yet if you ask that governing body if they were responsible for the loonie’s fall, the answer is a resounding no. Instead, the explanation is that the ups and downs of the Canadian dollar are determined by the market. Yet it is odd that this change in verbal language and the open chatter about the economy seemed to directly result in the devaluation.

Some believe that the loonie will eventually be down to 85 or 86 cents when compared to the US dollar and that it could be there for the long term. Is this good for the economy, or not? Certainly it would bring more orders from those importing Canadian goods. But consumers buying goods coming in from south of the border will have to pay more.

No matter whom you consider responsible the loonie is fluctuating more than it has in nearly a decade. Will this hurt or help the economy? We’ll just have to see what the Bank of Canada has planned next. Oh, that’s right, the bank wasn’t responsible. Interesting.

via:http://edmontonrealestateinfo.com/loonie/