The Canadian dollar is at an almost 2-year low. What does that mean for inflation? – National

like the one in Canada crazy falters against rising US dollar, experts say effect could worsen inflation on some goods imported from south of the border.

the Canadian dollar it stands at 75 cents against the benchmark US dollar as of Tuesday, a nearly two-year low for the Canadian dollar.

Economists say there could be a few reasons for the Canadian dollar’s weakness.

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RBC Assistant Chief Economist Nathan Janzen tells Global News that Canadian oil exports have historically been a “big driver” for the value of the dollar and that lower prices at the pumps have not helped the Canadian dollar.

But he and other economists who spoke to Global News point out that the relative strength of the US dollar, not the weakness of the Canadian dollar, is what separates the two currencies.

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“The US dollar has done very well against almost all currencies,” says Paul Ashworth, chief North America economist at Capital Economics.

Indeed, the Canadian dollar has performed relatively well against the rising US dollar, due in part to the tightness of the US and Canadian economies, says Ashworth.

While the Canadian dollar is down 5.5% year-to-date against the US dollar, the Japanese yen is down almost 20%, the British pound 16% and the euro 12.4% so far. goes of the year .

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Janzen points out that much of the currency’s movement is tied to uncertainty in the global economic forecast. Russia’s war in Ukraine, tensions over Taiwan, and the lingering effects of the COVID-19 pandemic are among those complicating factors.

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“When there is a lot of uncertainty about the outlook globally, there tends to be a flight to safety in terms of cash flow into assets,” he says. “And typically that means flowing into US dollar assets.”

How does a weak Canadian dollar affect inflation?

A weaker dollar hurts the purchasing power of Canadian companies looking to import goods from south of the border.

“A weaker Canadian dollar simply means higher import prices, and that means higher inflation,” says Benjamin Reitzes, managing director of Canadian rates and macro strategist at BMO.

US exports to Canada totaled $365 billion last year, according to US trade figures.

Machinery, vehicles, and mineral fuels are among the most valuable commodities that Canada imports from the US, but Canadians also get a lot of agricultural products like grains, pasta, fresh fruits and vegetables, meat, and alcohol. from US suppliers.

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“Unfortunately for most Canadians and for the economy in general, we are… dependent on the US,” says Reitzes.

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He adds that the silver lining in trade could be that since the Canadian dollar has largely “outperformed” currencies other than the US dollar, businesses and consumers could find they are winning in China and other foreign markets.

Ashworth agrees, adding that global shipping rates have dropped “very considerably” in the last six to 12 months compared to the headline-grabbing supply chain disruptions seen last fall.

Cheaper costs for trucking and freight shipping on the world stage could offset the weakness of the Canadian dollar compared to its US counterpart, says Ashworth.

“Overall, I think they’ll probably argue that it’s a little bit better, although the stronger US currency is the only thing that’s adding a little bit to the inflationary pressure there.”

How low will the madman sink?

All eyes in global markets will be watching Wednesday’s interest rate decision from the US Federal Reserve for signs of how much higher its benchmark rate will go.

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Rising rates are generally good for currency securities, Ashworth notes, as investors are drawn to markets where they will earn better returns based on higher interest rates.

“As your interest rate rises in a country, you would normally expect to see the currency strengthen,” he says.

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The Bank of Canada’s relative aggressiveness on this front has been a boon for the loonie, says Reitzes.

“On a relative basis, we’re not doing too badly because Canadian interest rates are rising as well. The Bank of Canada has been among the most aggressive central banks,” he says.

Tuesday’s lower-than-expected Canadian inflation figure is a possible reason the loonie was down 0.8% on the day, as Reuters notes some economists see the data as opening the door to lower future rate increases.

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But following a US core inflation print unexpectedly high in August, Ashworth says money markets are cooking up a 75 basis point rate hike by the Fed on Wednesday, with a minority of voices calling for a full percentage point hike.

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From that perspective, he says markets could see a 0.75 percentage point rise as “moderate,” a move that discourages higher rates and could sink the US dollar a bit.

But a 100 basis point hike by the Fed is “certainly not impossible,” Janzen notes.

In addition to the number, economists will hear language from Fed Chairman Jerome Powell on how high rates need to go and how fast they need to get there. These are all factors that could push the US dollar higher still.

Reitzes says this is another factor driving the Bank of Canada to, if not keep pace with US interest rate decisions, then at least continue to raise its own policy rate and keep the Canadian dollar competitive. .

The Federal Reserve is expected to deliver its benchmark interest rate decision on Wednesday at 2 pm ET.

— with Reuters files

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