Loonie Races Ahead: The Canadian Economy’s Economic Health
Loonie Races Ahead: The Canadian Economy’s Economic Health
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Home Page > Finance > Loonie Races Ahead: The Canadian Economy’s Economic Health
Loonie Races Ahead: The Canadian Economy’s Economic Health
Posted: Jun 21, 2010 |Comments: 0
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If the currency of a nation is like its stock and represents the health of its economy, the Canadian dollar also called the Loonie seems to be the best example as it raced ahead of its southern counterpart’s currency. The Loonie’s rise to beyond parity, with the US dollar is being touted as a representation of the Canadian economy’s economic health vis-à-vis the G7 economies. The reason for the surge is the Canadian central banks proposed to raise interest rates in the interest rate review in June.
Canada’s economy seems to have turned around faster due to a more robust and sound banking system backing the economy. The World Economic Forum has rated the Canada’s banking system as the world’s soundest for two straight years, something that has assistanceed Canada weather the economic storm more comfortably. International Monetary Fund also stated that the Canadian economy is likely to grow the fastest among G7 countries in 2010 and 2011 Firm housing prices and an increase in demand for commodities like oil and copper have also assistanceed the Canadian economy.
In contrast to Canada’s likely hood of raising interest rates in the coming quarter, UK’s Bank of England, the US Fed, the ECB and the Japanese central bank are unlikely to raise interest rates in a jiffy. The different strategic approaches being followed by the Canadian central bank on the one hand and the other developed country central banks indicate the states of their respective economies. It is widely expected that once these economies start emerging from recession, inflation could set in due to the excess liquidity pumped into these economies arising out of the bailout packages and the prolonged low interest rate regimes. To tackle this inflation, the central banks would need to tighten monetary policy and will raise interest rates, besides undertaking other measures to reduce liquidity in their economies. With Canada being one of the first developed nations to announce its intention of raising interest rates in the next quarter review, it is quite clear that the Canadian economy is positioned to enter a growth phase earlier than the rest, who are still unsure about their economic footing.
As the US and the Canadian economies are closely interlinked, there is a limit to the quantum of interest rate differential that Canada can have with the US. 1.25% to 1.5% is the maximum level Canada may be able to raise interest rates beyond the US Fed rates as anything higher may lead to a much stronger Loonie, which could become harmful for exports to the US and other nations as well. The interest rate differential could also dampen the health of the Canadian banks, whose lending rates would become much higher than that of US banks and they could lose business to US banks and that of other nations.
Thus, while the Loonie may go above parity with the US dollar or may be a tad lower than parity at other times, its strength seems to be here to stay for some time, especially until some of the other G7 economies perk up.
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