Good Morning!
The loonie has been taking it on the chin lately.
The Canadian dollar fell to a three-week low against the U.S. dollar last week after retail sales came in lower than expected, a signal that higher interest rates are starting to pinch.
“High mortgage rates are starting to bite Canadians’ wallets,” Adam Button, chief currency analyst at ForexLive, told Reuters. “Canada is particularly sensitive to higher interest rates and that will lead to divergence in U.S. and Canadian economic performance in the second quarter and beyond.”
The Canadian dollar hit its weakest intraday level since March 31 that day at 73.73 U.S. cents. Today the loonie slipped further to 73.65.
“A weaker Canadian dollar means higher import prices. That’s fine in normal times, but with inflation flying high already, the concern is that a weaker CAD could worsen the burden of high prices,” write RBC assistant chief economist Nathan Janzen and economist Claire Fan in a recent note.
“This could in turn push the BoC to follow the U.S. Fed by resuming rate hikes.”
But the economists argue that these concerns, though not unwarranted, “are often overblown,” and currency fluctuations matter less to prices than they once did.
For one thing Canada has become more of a services economy. About 80 per cent of the total value of goods and services consumed in Canada are now produced in Canada, according to the Organisation for Economic Co-operation and Development.
Over half of this is services, which includes things like rent, education and childcare that are provided within the country, said the economists. Even with imported goods much of the final price tag is tied to domestically produced services such as retail, wholesale and transportation, expenses that are not directly impacted by currency fluctuations.
At the same time, the U.S. dollar has become less important to imports into Canada than it once was. America is still Canada’s biggest trading partner, but that share is slipping. According to the OECD, the U.S. accounted for about 46 per cent of total Canadian consumption imports in 2018, down from 56 per cent in 1995. Most of this trade has gone to China which made up 12 per cent of total imports in 2018, compared to two per cent in 1995.
Since the Canadian dollar is stronger against the Chinese yuan, higher quantities of cheaper imports from countries other than the United States should offset some of the pressure caused by a strong U.S. dollar, said Janzen and Fan.
