Patricia Croft is the former chief economist for RBC Global Asset Management
Exporters beware: Over the next 12 months, get ready for a Canadian dollar at $1.15 against the U.S. greenback -- or higher. The loonie will also strengthen against the yen, Euro and pound sterling. A number of factors are aligning to drive the dollar higher.
This week, the The Bank of Japan slashed interest rates to zero and put aside $60-billion to buy financial assets - not just government bonds but ETFS, REITS and commercial paper - and took the plunge into unconventional waters. With developed economies everywhere focused on fiscal restraint, monetary policy must now shoulder the burden of sustaining fragile economic recoveries amidst disconcertingly high levels of unemployment.
The Federal Reserve has already dropped large hints that some additional form of quantitative easing lies in store for the U.S. economy, as has the Bank of England. Meanwhile, the European Central Bank has stepped up its purchases of euro zone bonds as Ireland’s woes have temporarily wrestled the front page from Greece and Portugal.
The further expansion of central bank balance sheets through additional quantitative easing will ultimately debase the value of these currencies.
In marked contrast, the Bank of Canada is the only G7 central bank that has embarked on the road to normalizing interest rates, now pausing with rates at 1 per cent. This sharp contrast in monetary policy will be one factor driving our dollar higher.
Meanwhile, oil and gold prices are soaring, and stock markets are rallying – the Canadian dollar’s fortunes are tied to the outlook for the world economy. As fears of double dip continue to recede, our dollar will climb higher.
Canada has its challenges – still-high unemployment, poor productivity – but post financial crisis we have emerged as a bastion of stability. This is a scarce commodity today – the end result will be further flows into Canada, taking our dollar much higher. No sense in complaining – Canadian exporters will have to adjust to this brave new world.
Patricia Croft is the former chief economist for RBC Global Asset Management
