The Curious Case of Canada's Currency

The Canadian dollar is riding high on the strength of strong exports and high energy and mineral prices. Industrial exports are down slightly as the dollar makes our goods slightly more expensive internationally, but home grown consumption has been pretty good - until May of this year that is. The Bank of Canada announced a few weeks ago that consumer-driven growth was flat through May, while it had been running around 2.5% each month previous to that, leading to speculation that the central bank will halt its slow increasing of interest rates on September 5.

Does this mean that the bloom is off the boom?

Two interesting statements were released this week, the first that housing starts were slowing, and the second that our trade with the United States is still dramatically lopsided.

How does this relate to the strength of Canada's dollar?

As with Canada, the housing market in the United States has been booming for the last few years, generating consumptive demand on both sides of the border. However, the American market is entering a decline in demand and looks ready to go into freefall in certain areas. The Americans are also entering a general economic lull, both of which means less demand for Canadian goods, both raw materials and finished goods. Looming in the background to all this is an eight trillion dollar debt and a weakness in the American dollar that some analysts fear is reday for a crash. Since the Canadian dollar is valued relative to the American, an initial fall in the price of the American dollar would cause the Canadian to appear to rise, helping to create a false economic picture. A collapsing American dollar would cut Canadian exports to the United States, putting a huge whole in our economy.

Alternatively, a housing slowdown in Canada might signal the end of the housing boom. If economic relations with the United States stay stable, then perhaps we can hit a plateau instead of a decline. At any rate, if you can avoid holding off on major purchases until the spring, give the economy a chance to form a clearer picture before committing yourself.