A surprisingly weak Canadian dollar is complicating the Bank of Canada\u0027s inflation fight, and could bring higher interest rates. Learn more.
The Canadian dollar hasn’t traded higher than 80 cents against the U.S. dollar this year, a low ceiling considering oil prices have surged well above US$100 per barrel. Canada exports lots of energy to the United States, so typically, higher oil prices drive up the value of the currency American importers need to purchase Canadian crude., the biggest gain in four decades, in part because of higher costs for consumer goods.
“When the price of oil in U.S. dollars goes up, the Canadian dollar tends to appreciate. What does that do? One, it dampens the inflationary shock for households at the gas pump, because it means the price in Canadian dollars doesn’t go up as much because the Canadian dollar absorbs some of that,” the governor added. “The other thing it does is that it spreads the benefits to Canada of a higher oil price because we’re an oil exporter. It spreads it more across the economy.
Schamotta added that the U.S. inflation numbers likely will force the Fed to follow the Bank of Canada and implement a one-percentage-point increase of its own. So, whatever boost the Canadian dollar might have received in the current interest-differential with the U.S. was lost the moment markets bet the gap would be short lived.
Macklem said the link between oil prices and the loonie has broken down for two main reasons: a shift in the longer-term outlook for Canadian oil exports and expectations for U.S. monetary policy.
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