Manyfactors fuelling loonie
BANK
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“Type 1” moves were driven by strong global growth and demand for Canadian goods, especially raw materials. Because demand for goods go up in lockstep with the dollar, there would be no need for the bank to respond by adjusting interest rates.
“ Type 2” moves were driven more by external factors such as last year’s slide in the U.S. dollar, and as such may not be beneficial to Canada. These could have a tightening effect on monetary conditions and policy may need to be more stimulative.
Yesterday, Mr. Dodge said the loonie’s recent moves were likely being driven by Type 1 and Type 2 moves and the bank was analyzing the weighting of the factors.
“Had things been sort of where they were in July, what we had seen is an appreciation to the US80¢, US82¢ range, and I think we provided more or less our views on that,” he said.
The bank had indicated it was becoming less concerned about the rise in the dollar because it was being driven by strong demand for energy prices.
“What’s happened since the end of August with Katrina and a number of other things, it becomes a little bit more difficult to make the analysis and that’s what we’re engaged in now so it’s premature for me to try to give you an answer.”
Mr. Porter said the bank may come round to the view that some of the loonie’s recent gains may be speculative.
Marc Lévesque, fixed income strategist at TD Securities Inc., added the bank may also be starting to look at the rise in oil prices as more of a supply shock.
“More recently what we’re looking at is a real supply shock issue, lack of refining capacity and you have to wonder if the Bank of Canada is going to look at that as being 100% Type 1-related,” he said.
Mr. Lévesque said the loonie’s recent move may not prevent the bank from raising rates from its meeting on Oct. 18 — provided it does not go a lot further. The bank raised rates 25 basis points this month.
While Mr. Dodge was clear the bank is watching the currency closely, it is also keeping a keen eye on the potential inflation threat from higher oil prices.
“It is our expectation … that headline inflation is going to go well above 3% in the coming months,” he said. “ We still view that as a spike but the longer it goes on obviously the greater the risk it’s going to feed through to other prices.”
Financial Post
jthorpe@ nationalpost. com