The Loonie is looking strong at $1.03 U.S., jumping in response to yesterday’s American Federal Reserve stimulus announcement. The latest Operation Twist measures, designed to jumpstart the American economy, include printing more money, keeping interest rates artificially low through bond buying, as well as a monthly $40B purchase of mortgage-backed debt. Fed Chairman Ben Bernanke also pushed back expectations for an American interest rate hike to 2015.
The measures are anticipated to inject $84B per month back into the U.S. economy, and counter sluggish employment levels. Bernanke also shared that the Fed is looking to avoid “major fiscal shock” from measures such as tax increases and spending cuts.
The Negative Impact From Our Neighbours
Canada has prided itself on keeping its relative cool during the 2008 Recession by employing stricter fiscal policy, and implementing restrictions to keep household debt in check. Why would American stimulus efforts put a dent in our meticulously guarded economic standing?
“Clearly the fiscal policies of [Prime Minister] Stephen Harper are so much better than the fiscal policies of any other G7 member so that Canada is perceived as doing everything right, but when everybody else is behaving [badly] … what happens naturally is that your currency is prized and this isn’t good,” said Don Coxe, strategy advisor to BMO Financial Group, to the Financial Post.
Troubling Trends In The Export Industry
The issue comes down to our delicate and inextricable trade relationship with our southern neighbours. Despite our economic role modeling, Canada’s economy and export industry can’t help but be affected.
Earlier this week, we reported that Canadian trade deficit had hit a record high of $1.93 billion, partly attributed to the strong dollar. As one in five Canadian jobs are tied to the exporting industry, troubling trends could also spell a downturn in our employment levels – and our further strengthening dollar will continue to have a negative impact on the industry as a whole. There are also fears of economic stalling next quarter, as our housing market slows down in several key urban centres, such as Toronto and Vancouver.
A Sharp Contrast
The Fed’s announcement also flies in the face of the economic belt tightening stance taken by Bank of Canada Governor Mark Carney, who recently implemented CMHC mortgage changes to make the housing market less affordable to would-be buyers depending on credit. While not popular with prospective buyers, particularly those buying for the first time in urban markets, the rules were part of efforts to prevent the the debt-ridden circumstances responsible for plunging so many Americans underwater on their mortgages. Now, Canadians will have to hope the economic measures taken by our Government will be enough, as we ride out the consequences of our neighbour’s actions.