TORONTO ? Canada’s economy is being threatened by “currency instability” as the loonie’s rapid decline from the U.S. dollar is hurting business and consumer confidence, economists warn.
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The loonie fell a week ago below 70 cents from the U.S. dollar the very first time since 2003, with the forex trading just under 69 cents on Monday. It’s fallen 33 percent from the greenback in the past 24 months, a pace that National Bank of Canada’s chief economist, Ste?fane Marion, notes is “without precedent.”
The Bank of Canada will probably address the loonie’s collapse if this holds its rate of interest announcement Wednesday.
“Currency instability has become a concern, and we think the financial institution of Canada will need to take note,” said Marion. “For Canadian businesses, currency depreciation has sent the price of machinery and equipment (73 percent of which is imported) to a different record high.”
The loonie was last at parity using the U.S. dollar in early 2013. While parity was a boon for consumers, specially those who bought goods or travelled south from the border, it hurt manufacturers who saw sales decline his or her goods became more expensive to market to international buyers.
While those same manufacturers welcomed a lesser loonie, the rate of the recent plunge has unsettled some businesses. Marion asserted by his team’s calculations, the loonie must have shed about 10 cents against the U.S. dollar in the past couple of months. However it has instead fallen by 25 cents.
“A volatile currency is evenly as bad for planning as volatile inflation,” said Douglas Porter, chief economist of BMO Capital Markets. “I’ve always thought it was interesting the Bank of Canada is really concerned about keeping inflation stable to help businesses and consumers plan and yet it’s almost as if the currency is really a complete afterthought.”
The loonie’s rapid drop has been exacerbated by crumbling oil prices and monetary divergence, as a strong American labour market and solid economic growth led the U.S. Fed to improve rates of interest in December. The financial institution of Canada, meanwhile, lowered its rate in one per cent at the outset of 2015 to 0.5 percent by the end of the entire year.