A couple days ago, CIBC announced it thinks the Loonie is overvalued by ten percent, dragging down the Canadian economy with it.
“A careful analysis of macro linkages suggests that,when adjusted for the deterioration in trade fundamentals and rate spreads, the currency is posing a meaningful drag on growth,” said Exarhos and Shenfeld. “That’s tantamount to tighter overall monetary conditions than are conveyed by looking at interest rates in isolation.”
The Globe and Mail stated Friday, “A lot of people are going to hate the economic recovery. Where we are now is the economic sweet spot – low interest rates to support our consumption of houses, cars and such, plus reasonably solid underlying fundamentals. A gauge of economic stress called the misery index now sits at its lowest point in 35 years for Canada.”
In other words, Bank of Canada, don’t raise interest rates to drive the currency higher and shock whatever nascent economic growth is out there. We like paying next to nothing for debt; free money is good. Why ruin the party? Everyone else is doing it!
As we have written before, the United States is starting to experience an ever slow steady increase in economic activity. This will be good for Canada’s financial fortunes over the next several years since Canada is inextricably tied to America’s economic activity. The Federal Reserve will raise interest rates, in my humble opinion, in September, barring some unexpected financial shock.
Canada’s organic growth is starting to spread to other sectors of the economy, away from the energy sector, as evidenced by the recent uptick in the employment report in early June. As America grows, this trend will continue and even accelerate. At some point, the energy sector will rationalize itself and begin to recover as well.
Canada should welcome an interest rate rise, not fear it. Yes, those who have accumulated high levels of debt should take action to reduce their risk as rates rise. However, we all need to get back to some semblance of monetary policy normalcy, and that means higher rates.
No nation has ever devalued their way to prosperity over the long term.
I have been and continue to be a contrarian when it comes to Canadian interest rates. I think the time to buy the Loonie is now. I’m sure I’ll catch a lot of flack for saying this as I did last time but my guy tells me I’m right. I think Canadian interest rate hikes will come a lot sooner than most people think, especially if we see growth really take off in the United States as we get closer and closer to a conservative sweep across all three branches of government. Regardless of your political beliefs, I think it’s safe to say we have reached the Keynesian peak of monetary and fiscal policy world wide. There will be much more responsible people in positions of power going forward as a general rule. Government spending will come down as a percentage of GDP throughout the developed world. Economies will move away from currency wars to create jobs. Beggar thy neighbor rarely works and creates many more unintended consequences. Canada, as one of the shining light leaders of the free world should be one of these.
Todd Wood is a former emerging market debt trader with 18 years of Wall Street and international experience. He is also an author of historical fiction. His first of several thriller novels, Currency, deals with the consequences of overwhelming sovereign debt. He is a contributor to Fox Business, Newsmax TV, Washington Times, and others. LToddWood.com