The Canadian dollar rallied to a 13 month high against the US greenback on news that the Federal Reserve plans to purchase bonds. The US central bank indicated that it would maintain interest rates near 0.0% until 2015 and begin buying mortgage securities to fuel economic growth. That announcement spurred investors to dump low yielding US assets in favour of more lucrative Canadian investments. One Canadian dollar buys $1.03638 US.
A strong loonie is not good news for the Canadian economy as it reduces the demand on our now more expensive exports. Reduced demand means fewer manufacturing jobs and more unemployment. Typically the Bank of Canada (BOC) would keep interest rates in step with the US to keep the loonie from appreciating, but Mark Carney and the BOC have warned that they may need to raise rates as our economy rebounds.
Canada is now out of step with Central Banks around the globe, and the suggestion that the BOC will raise rates is absurd. If anything we are now facing downward pressure on interest rates. Of course a drop in the overnight rate would lower the bank prime rate which in turn lowers variable mortgage rates.
Perhaps Jim Flaherty and the Department of Finance knew what they were doing when they tightened mortgage rules yet again this summer. They weren’t trying to slow the housing market but instead were preparing for another round of interest rate cuts.