Will the Loonie Own the Podium?

The main question about this morning’s Consumer Price Index is whether it will propel the Canadian dollar to parity with the American dollar. Higher inflation would increase the chances of our central bank raising interest rates sooner rather than later. Higher interest rates would make the loonie a more attractive holding for international financiers.

In fact, today’s figures show the annual inflation rate falling from 1.9% in January to 1.6% in February. With the Bank of Canada’s target range running from 1% to 3%, these figures hardly make the case for raising interest rates.

Perhaps more noteworthy was core inflation edging up from 2.0% to 2.1%. The Bank of Canada uses core inflation as a policy guide because it excludes volatile prices like food and gasoline.

Some people watch the exchange rate like an Olympic sport, cheering the loonie higher out of patriotism. (This patriotism is misguided because an excessively high Canadian dollar hurts our economy.) For these Olympic-style enthusiasts, higher core inflation may appear to bode well for higher interest rates and hence a higher loonie.

Ironically, core inflation was higher largely because Canada hosted the real Olympics in February. As a result, Statistics Canada reports that the price of traveller accommodation in British Columbia shot up 64%.

Thanks to the Olympics, B.C. definitely owned the podium in terms of inflation. Between January and February, the overall price level rose more than twice as fast in B.C. as it did nationwide.

Hotel rooms are part of the Consumer Price Index’s “recreation, education and reading” component. Nationally, the entire increase in this component over the past year occurred in February.

Traveller accommodation is included in core inflation because its price is not normally volatile (except for seasonal changes, which do not affect the annual rate.) However, higher hotel-room prices last month compared to February 2009 are clearly transitory. Therefore, in setting future monetary policy, the Bank of Canada should not put much stock in February’s slightly higher core-inflation rate.

It is difficult to predict how aggressively the central bank will raise interest rates or where speculators will push the loonie. But today’s Consumer Price Index figures provide no compelling justification for the higher interest rates that some speculators rightly or wrongly anticipate.

4 comments

  • Has anybody had a look at the exchange rates variability since Harper came into office. Is it just me or has it been jumping around like a fish out of water.

    In just 3 years- .80’s to 1.14 then to the high 70’s then around and back again to parity.

    I wonder how the variance compares to other countries currencies experiences over this period.

    My guess would be, they cannot raise rates with the dollar showing all this strength or they we will surely have further recessionary winds hit whats left of the export infrastructure base, aside from oil. However this time the recessionary winds will be of the made in Canada variety.

    So unless they address the dollar’s rise although they may have a political- throw me out of office wish- then they may try and do both. Let the dollar float and raise rates to further pound away at the economy.

    More arrows going in the wring direction!

  • Also this has many environment friendly facts, that a stronger dollar ensures versus human intervention into slowing down coal mining and oil & gas extraction arbitrary. So many resources would be forced backed into the ground regardless of what any human thought or said regulation with costing the taxpayer a dime to enforce and a minute to legislate. Market forces working eh?

    Since the Higher dollar will be as I wrote months ago, what should we do, force the currency down, no, no, no as this is a simplistic view of what has historically has worked, where the main edge of Canadian competitiveness was derived from for years.

    I wrote “I expect our dollar to go higher, in that scenario Business will suffer with current tax and regulation laws finding it hard to compete, So we must lower taxes on your small businesses change our regulation to become efficient not just add regulation but serious reform, some regulation we don’t need, some regulation only does bloat certain pay grades and pay checks.”

    However we all agree what China is doing is wrong, yet we from the so called developed advocate a lesser form??? Two wrongs dont make a right!

    I also do not think Canadian wages are to high, wagers are a misnomer and when its said they affect the bottom line, is a scapegoat by companies because the costs associated with wages can be controlled by them.

    The costs run up by endless regulation, and the taxes, we have over the years placed on small business when we thought our dollar would always be weak cannot be removed, unless we remove them, but we cannot do that because of how much spending is allocated and the corresponding missing revenues that would pile up in municipalities, provinces, and federally is staggering. This one, can see why many would like to treat this from the exchange side by lowering our currency.

    Without touching wages or pensions, or the dollar, leaves us with eliminating the cost of running a business by streamlining regulations to make them less complex, user friendly, less forms to fill. Lowering the tax burdens of business without cutting public service, etc can only be done in my mind through consumption taxes.

    A prediction the central bank will rise rates, if Carney slowly rises rate as possible, he will ensure many problems and none of the ones the rise of rates were meant to solve, mainly the misalocation of resources and workers to unsustainable sectors. First speculators betting on further appreciation will jump right in making the case for aggressively raising rates in a fashion equatable to Paul Vockler to crush forming bubbles and stop the misalocation of workers to those areas which are unsustainable especially those evil speculators that even any progressive will have to admit Paul Vockler did quite successfully.

    Why should thousands of Canadian directly and indirectly be trained to build, furnish, or design houses, as these longer term become liabilities as you get immobile workforce untrained in new skill-sets and technologies.

    When will raising rates not be premature? Is there any situation you can imagine where not raising rates would hurt Canada?

    @ Yes, Paul T someone has, this is not Canadian dollar strength but US dollar weakness and not just US weakness but most FIAT currencies that are not considered the commodity currencies, or productive creditors.

    Given the US fiscal situation, if a case of 70, pops up in the next few years, the FED will not be able to act like PaulVockler for many reasons specific and gerneral. That will scare Canada into fiscal restraint , real restraint, the old kind… when the US dollar weakens to a unacceptable point for Canadians despite goverment intervention.

  • “Ironically, core inflation was higher largely because Canada hosted the real Olympics in February” That you dont have to have a general wide increases in the CPI for inflation to occur. Nor did unemployment keep it down in that month. Inflation can occur anywhere the governmet artificially spends tax payer dollars and bid prices higher then market conditions. The taxdolars spent into education,healthcare, etc have led to price increases in those sectors while not affecting the CPI since the prices our excluded. It also tells me that spending tax dollars in seemingly benign projects is worse citing the Olympics and is not worth the long term pain that is associated with wasteful spending of tax dollars.

  • The Bank of Canada made a mistake when it signalled higher interest rates to come. Speculators have started factoring the hike into their calculations, driving up the dollar, and adding to deflation. Normally the best policy for the Bank is to wait in the weeds, but these people have power and they want to use it. Woe unto us.

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