Canadian exporters, including farmers, will need to get used to a strong loonie over the next year or so.
That’s partly because the federal government is reluctant to participate in what is being called a global currency war, says the chief economist with the Canadian Imperial Bank of Commerce.
Governments and central banks in China and Japan have devalued the yuan and yen over the last couple of months in an attempt to make their exported goods and services more competitive.
Read Also
Alberta crop diversification centres receive funding
$5.2 million of provincial funding pumped into crop diversity research centres
However, Avery Shenfeld said the Bank of Canada is unlikely to join the skirmish because Canadians prefer to play fair.
“Well, Canada has behaved like a boy scout, following the rules and letting markets dictate,” Shenfeld said.
“We’re not threatening to do anything to weaken our own currency.”
Shenfeld expects the loonie will trade at parity with the U.S. dollar over the next year, even though he thinks the Canadian dollar would be significantly weaker in an ideal world run by boy scouts.
“The Canadian dollar is being propped up at an artificially strong level,” he said earlier this month as the loonie appreciated.
Other countries are keeping interest rates at extremely low levels or printing more money to exert downward pressure on their currencies.
This currency conflict isn’t a new phenomenon, said Martin Schwerdtfeger, an economist with TD Canada Trust.
Countries have flouted international agreements in the past, manipulating exchange rates for economic advantage.
“Sometimes politically for countries it’s easier to target the exchange rate and not address the more structural issues that are behind the currency appreciation or depreciation.”
For example, the Chinese yuan has become a major issue in this fall’s U.S. congressional elections.
Republicans and Democrats have promised that if elected, they will force China to allow the yuan to rise more rapidly, which in theory would make American exports more competitive and create jobs in the United States.
Schwerdtfeger doubts the Chinese will readily cede to such demands, so the currency war may intensify.
Consequently, Canada’s higher interest rates and relatively strong economy might attract more global investors and push the loonie higher, he said.
“If the U.S. dollar depreciates, people may seek a higher return on Canadian assets that are deemed to be relatively safe.”
Sal Guatieri, senior economist with the Bank of Montreal, concurred that the loonie will appreciate over the next year, mostly because of the laws of mathematics dictating that, if certain countries keep their currencies down, other currencies must rise.
