The Canadian dollar at par with the American dollar? Yes, it is only a question of time say economy watchers. And the Loonie has flown up above 98 cents U.S., and could well remain a few cents below or above the U.S. dollar for awhile.
According to David Rosenberg, a serious economic analyst, the Bank of Canada goofed. It signaled a readiness to raise Canadian interest rates before the U.S. sent a similar signal. The Bank of Canada rate has been sitting at one quarter of one percent for awhile. The U.S. rate is "zero bound," lower than low. When Canadian interest rates go above U.S. rates, our dollar rises against the U.S. dollar. Tell speculators in advance about your move, and they move today, sending the Canadian dollar higher, even before rates increase.
The anticipation of a profit leads to buying Canadian dollars in order to sell them when the Loonie surges some more. The Bank of Canada created a clear perception that the Loonie would rise, and currency markets move on clear signals. Rosenberg thinks the speculators have overvalued the Canadian dollar by about six cents. A rising dollar makes our dollars go further abroad, which is great, if you happen to be abroad. If you're in Canada, consumer products you buy from abroad do not fall in price because our dollar buys more abroad. Importers do not like to pass on any savings to consumers because the move could reverse.
Knowing this, Canadians get their passports out, and head South on day trips. When goods made in Canada start to look more expensive than similar goods made abroad, Canadian producers (along with consumers) shift spending abroad as Canadian companies try to maintain profits. All this spending abroad comes when Canadian families (and companies) are carrying a lot of debt and trying to pay it down. The effect is to add more saving and subtract from spending in Canada at a time when Canada is struggling to come out of a downturn. A rising dollar at this time makes no sense. It kills recovery. The number one concern in Canada is jobs and incomes. When it increases interest rates, the Bank of Canada takes money out the economy. Decreased spending in Canada and increased spending abroad by consumers and producers will see to that.
The Bank of Canada wants spending to fall because it is trying to head off inflation. It should be concerned about what everybody else is concerned about: creating jobs and maintaining the ones we have. Our higher dollar means its costs less in Canadian dollars for Canadian companies to buy assets abroad. Encouraged by lower costs, expect Canadian companies, the banks in particular, to make bad investments in the U.S. That is all they have ever made, and they never learn. Canadian banks have too much money. We should be taxing their profits more seriously and regulating their service charges down to zero. They should be allowed to make money only through prudent lending, not as at present, encouraged to speculate abroad, because they scoop up an ever higher percentage of total Canadian corporate profits. The Bank of Canada is owned by the Canadian government and was created by it 75 years ago. Today it acts as if it were independent of government direction.
Since 2007, the Canadian dollar has been bouncing up and down against the U.S dollar. It started 2007 at 85 cents and went up to 1.09 U.S. By October 2008 it was back down to 77 cents. As the dollar heads to parity again, the Bank should be concerned about the uncertainty wide currency fluctuations represent and quit pretending it pays no attention to the value of the dollar. As provided for in our constitution, Canadian governments should start taking responsibility for banking and currency questions.
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