The central bank of Canada on May 31 announced no change to the benchmark interest rate, marked the continuation of the relatively loose monetary policy. At the same time, the Canadian dollar remains at $1.02 USD level, after dropped from over 1.05. Many investors are expecting the Canadian dollar to remain at or above par with the US dollar for a considerable amount of time, because the Fed is expressing no intention of tightening monetary policy, while Mark Carney did say in the news release that
“To the extent that the expansion continues and the current material excess supply in the economy is gradually absorbed, some of the considerable monetary policy stimulus currently in place will be eventually withdrawn, consistent with achieving the 2 per cent inflation target.”
which many finds as indication of tightening the policy.
There was also a note specifically on the exchange rate,
“ the persistent strength of the Canadian dollar could create even greater headwinds for the Canadian economy, putting additional downward pressure on inflation through weaker-than-expected net exports and larger declines in import prices.”
The fact that a stronger Canadian dollar may have deteriorating effects on the productivity of Canadian companies was reported earlier in April. On April 15′s Financial Post, several articles pointed out that the stronger loonie reduces productivity, attracts less foreign capital, and increase the real supplier price of imported goods. Some excerps
“Higher commodity prices boost the loonie, and that in turn can squeeze manufacturing, boost incomes and employment in services and the public sector (as the government becomes flush with tax dollars), and by encouraging development of less economically viable resource bodies.”
On Foreign Direct Investments:
“The more productive an economy, or the more goods a worker can produce in an hour, the higher that country’s standard of living, economists say. Canada, however, has long underperformed in that regard, particularly in relation to its largest trading partner, the United States.
The issue is now further complicated by a Canadian dollar that has climbed above parity with the U.S. greenback, and which will hurt exports for years, Bank of Canada governor Mark Carney warned on Wednesday.”
On supplier prices:
“The reality is that the underlying prices that Canadians pay and Americans pay really don’t change that much over time, but the currency has these huge swings that can make this sort of comparison shopping between Canada and the U.S. go all over the place,”