In this week’s EconMinute, we’re talking about the Canadian dollar.
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This month, we are starting to see a divergence in interest rates between the US and Canada, with consequences for the value of the Canadian dollar.
On March 8th, the Bank of Canada (BoC) decided to hold its interest rate steady for the first time in over a year. This decision has been met with relief by Canadians, as BoC governor Tiff Macklem signalled a “conditional pause” in the rate-hiking campaign to assess whether it had done enough to quell inflation. Indeed, inflation in Canada is trending downward–falling to 5.9% most recently.
In contrast, the US Federal Reserve is expected to continue raising its interest rates to combat higher inflation, currently at 6.4%. The next announcement will be on March 22nd.
Unfortunately for Canadians, this divergence in interest rates means that the Canadian dollar will likely depreciate against the US dollar. In fact, the loonie hit a four-month low at 72.39 US cents right after the BoC suspended its tightening campaign.
Here’s what this means for Canadians:
- For consumers, a weaker dollar will drive up the cost of goods imported from the US, which means higher prices. This could drive up inflation since Canada’s economy relies heavily on US goods.
- The US is Canada’s principal trading partner, with US imports to Canada totalling CAD$297 billion in 2021, accounting for 49% of total imports.
- These imports are largely vehicles, machinery, and mineral fuels but also include a variety of agricultural goods such as cereals, sugar, fruits, and vegetables.
- For producers, however, a weaker Canadian dollar is advantageous.
- Exporters benefit from a weaker Canadian dollar because, when goods are sold in US dollars, that US dollar, when repatriated, can buy more Canadian dollars.
- Ontario, Alberta, and Quebec are Canada’s three largest exporters, with most goods destined for the US.
- Ontario exports a lot of gold and vehicles, most of Alberta’s oil and natural gas is exported to the US, and Quebec exports large quantities of aluminum.
- Alberta’s economy, in particular, relies on international exports. As such, a weaker Canadian dollar is especially impactful on the provincial budget as it impacts the profitability of energy producers and, therefore, the amount of royalty revenue the province receives.
- For every 1 cent decrease in the USD/CAD exchange rate, provincial revenues rise by $490 million.