North America’s “other dollar” is making steady advances against its bigger neighbour, buoyed by the prospect of US interest rate cuts.
Canada’s national currency was trading at $0.77 this morning, up on $0.74 a month ago, on 15 June, and $0.76 a year ago, on 15 July 2018.
Further gains are expected as the Canadian authorities show no sign of following the expected rate cut from America’s central bank, the Federal Reserve, at its next meeting on 30 and 31 July.
“A process of convergence”
This makes Canadian-denominated assets more attractive to investors, thus the current strength of the currency.
At present, the key US rate, the Federal Funds Rate, is in the range of 2.25% to 2.5%, while Canada’s base rate is 1.75%. But with American rates tipped to fall, the Bank of Canada’s (BoC) no-change policy is bolstering the Canadian dollar.
She added: “Activity here at home is being supported by a policy rate that’s lower than south of the border. By the second half of this year, growth should be similar in both economies as they converge on their respective potential level of activity.”
While Canada’s economy is considerably smaller than that of its giant southern neighbour, it is one of the most substantial in the world, and Canada is a member of the Group of Seven rich nations. It has a large oil and gas sector and is a major producer of agricultural commodities.
Linked to US dollar
In its most recent Article IV health check, a year ago, the International Monetary Fund (IMF) commented: “The economy has continued to perform well…The positive momentum in the economy is expected to continue in the near term, with real [inflation adjusted] GDP [gross domestic product] moderating to a more sustainable growth rate of about 2% in 2018 and 2019.”
The Canadian dollar dates back to the 1867 confederation that created Canada. It replaced an assortment of currencies including the British pound.
Unusually, among self-governing Commonwealth countries Canada did not join the sterling area, established after the First World War and whose countries pegged their currencies to the pound. Instead, Canada linked the currency’s value to that of the US dollar.
More recently, Mark Carney, Governor of the BoC from 2008 to 2013, has served as Governor of the Bank of England, joining in 2013 and due to step down in 2020.