Volatile loonie seeks direction.
It’s like the markets and the Bank of Canada are playing tug of war and the loonie is the rope. The Bank of Canada seems to want the dollar to remain low to give a currency advantage for Canadian exporters looking to sell into the U. S. The market, meanwhile, sees enough strength in the economy to tug the loonie to a higher price.
At the moment, the market seems to be winning the battle, pulling the loonie to nearly 75.50 U.S. cents at one point Wednesday, up about two per cent from last week. Yet Stephen Poloz, governor of the Bank of Canada, earlier this week spoke about the challenges for Canadian exports, and that’s seen as a signal the bank doesn’t want the loonie to get too strong just yet.
The unanswered question is whether the bank will loosen its grip entirely, and let the market haul the Canadian dollar in a firm direction.
The loonie has been on quite t he roller coaster ride this year. In January, it charged ahead with one of its fastest rises on record, but by late February it began to falter. It ultimately slid to a year- to- date low of 72.73 U.S. cents on May 4.
To the average Canadian — that is, to someone not playing the high stakes currency market, but someone simply tracking the exchange rate with an eye to timing a U. S. vacation or a cross- border shopping trip — the loonie’s ups and downs may seem nauseatingly volatile.
That’s not really the case, says Andrew Grantham, a senior economist with CIBC. If it seems like the loonie’s been jumping around more than usual, it’s because the loonie is trying to find its groove in a market that is sending out some mixed signals.
“Maybe it feels like it’s been more volatile just because there hasn’t been any clear direction in the currency,” Grantham said.
The loonie’s movements tend to reflect two huge factors: the price of oil and the gap in interest rates between Canada and the U. S.
So far this year, those f orces have put a l ot of downward pressure on the loonie. Oil prices haven’t been great, falling beneath US$ 45 on Wednesday and down more than seven per cent this month.
Meanwhile, the interest rate gap is broadening. On Wednesday, the U. S. Federal Reserve added another quarter point to its target range of 1.0 to 1.25 per cent. The Bank of Canada’s policy rate has been 0.5 per cent since July, 2015.
But the market doesn’t only look at what’s happening now. It often looks ahead to what might happen later. Strong economic data has led the market back to the loonie in expectation the statistics are laying the ground work for an interest rate hike.
Canada’s economy grew at an annualized rate of 3.7 per cent during the first quarter. Employment numbers and business investment suggest the economy has recovered from the technical recession that followed the oil price downturn.
Until this week the Bank of Canada had dropped no signals it would hike the target for its trendsetting overnight rate of 0.5 per cent.
That c hanged earlier this week when top officials from the bank made statements that suggested tightening might happen sooner than previously thought.
Grantham said CIBC now expects the Bank of Canada to raise its interest rate target in the fourth quarter. It previously thought a rate hike wasn’t coming until 2018.
“It does seem like the Bank of Canada is finally coming around to the idea that the Canadian economy is actually in pretty good health at the moment. They don’t need these emergency low interest rates and they can start very gradually increasing them,” Grantham said.