Forecasts that the Canadian dollar would appreciate to 80 cents US this year appear to be fading.
After hitting a 101/2 year high of 78.89 US cents in January, the loonie has dropped to around 74.5 cents.
For Canadian farmers, this is good news. The 20 percent appreciation of the loonie in the last year was hard on them, reducing prices of grains and livestock by about the same amount.
As usual, the recent change to a more stable Canadian dollar has more to do with changing economic conditions in the United States than in Canada.
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After a period of anemic growth, the U.S. economy appears to have taken off with recent reports of stronger than expected job growth, retail sales and a narrowing trade deficit.
This has caused speculation that the stronger economy will generate inflation. To fight it, the U.S. central bank will raise the interest rate from its 46-year low of one percent, perhaps in August.
If they come, the stronger U.S. interest rates should attract foreign investment in the greenback, raising its value.
As talk increased last week about a higher U.S. interest rate, Canada’s central bank lowered rates.
Economic news has been less rosy here lately. After strong job growth last year, the latest employment report was disappointing and the Bank of Canada lowered its estimate of first-half growth to 2.75 percent from its January forecast of three percent.
To stimulate the economy, the bank lowered interest rates by 25 basis points April 13, but indicated it would resist another drop unless the economy takes an unexpected turn for the worse.
There is still the potential for American economic news to turn sour and the U.S. national deficit continues to grow, but for now it seems currency traders are more upbeat about the greenback.
And with the spread between Canadian and American interest rates forecast to narrow, the formerly high flying loonie should remain grounded.
While BSE, drought and grasshoppers got most of the blame for low farm incomes, the devastating impact of last year’s fast climbing currency can’t be ignored.
The Canadian farm economy can ill afford another rapid seven percent appreciation in the currency to 80 cents.
The Bank of Canada should do all it can to keep the loonie stable.
