The Canadian dollar – AKA the “loonie” – stumbled a bit yesterday on its way to parity with its US counterpart after the Bank of Canada made it clear that it was not happy with the loonie’s recent gains on the US buck. In what can only be described as a strongly-worded warning, the Bank of Canada issued a statement saying that the “current strength in the dollar is expected, over time, to more than fully offset the favorable developments since July”. In other words, the loonie’s rise against the US dollar is threatening the early stages of Canada’s recovery, so stop buying it!
Canada relies heavily on its exports – both commodities (especially oil and gas), as well as manufactured products – and the US is the primary market for these goods. However, with each passing day, it seems that the loonie continues to advance on the dollar thereby erasing Canada’s exchange rate advantage.
The Bank of Canada’s tough talk yesterday did result in a two cent retracement on Tuesday, but it appears that investors thought about this over night and determined that there is really not much the Bank can actually do right now to devalue the loonie. Interest rates are already in a band from 0 percent to 0.25 percent so lowering the lending rate to make the loonie a less attractive investment is not a possibility so the buy was back on today resulting in a gain of 0.7 percent to 1.0424 Canadian dollars to each US dollar by 11:30 AM.
In short, investors decided to call the Bank’s bluff. Expect some more harsh words from the bank in the coming weeks if the loonie doesn’t settle down.
