The Canadian dollar is at its lowest level in nearly two years. What does that mean for inflation? – National

like Canada looney Stumbles Against Rising US Dollar, Experts Say Impact May Exacerbate inflation On some goods imported from the south of the border.

The Canadian dollar It stands at 75 cents against the benchmark US dollar as of Tuesday, the lowest level in nearly two years for the Canadian currency.

Economists say there could be several reasons for the weakness of the Canadian dollar.

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Nathan Janzen, RBC’s assistant chief economist, tells Global News that Canadian oil exports have historically been a “big driver” of the dollar’s value and that lower pump prices haven’t helped the Canadian.

But he and other economists who spoke to Global News point to the relative strength of the US dollar – not the weakness of the Canadian dollar – as the difference between the two currencies.

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“The US dollar was turning into gangs against almost all currencies,” says Paul Ashworth, chief North American economist at Capital Economics.

In fact, the Canadian dollar has done relatively well compared to the strength of the US dollar, in part due to the tightness of the US and Canadian economies, Ashworth says.

While the Canadian dollar is down about 5.5 percent year-to-date against the US dollar, the Japanese yen is down about 20 percent, the British pound is down 16 percent, and the euro is down 12.4 percent so far this year. .

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Janzen notes that most of the currency’s movement is linked to uncertainty in the global economic outlook. Russia’s war in Ukraine, tensions over Taiwan, and the ongoing effects of the COVID-19 pandemic are among those complicating factors.

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“When there is a great deal of uncertainty about the outlook globally, there is a tendency to be insecure about your cash flow into assets,” he says. Usually this means the flow of assets in US dollars.

How does a weak Canadian affect inflation?

A weak dollar is affecting the purchasing power of Canadian companies seeking to import goods south of the border.

“A weaker Canadian dollar simply means higher import prices, and that means higher inflation,” says Benjamin Ritzes, managing director of Canadian rates and macro strategist at BMO.

US exports to Canada totaled $365 billion last year, According to US trade figures.

Machinery, vehicles, and mineral fuels are among the most valuable goods Canada imports from the United States, but Canadians also get a large number of agricultural products such as grains, pasta, fresh fruits and vegetables, meat, and alcohol from American suppliers.

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“Unfortunately for most Canadians and the economy as a whole, we are … dependent on the United States,” Ritzes says.

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The bright side of trade, he adds, could be that because the Canadian dollar has largely “outperformed” currencies other than the US dollar, businesses and consumers can find that they are leading purchases from China and other overseas markets.

Ashworth agrees and adds that global freight rates have fallen “quite significantly” in the past six to 12 months compared to the supply chain turmoil that made headlines last fall.

Ashworth says the cheaper costs of trucking and freight forwarding on the world stage could offset the Canadian dollar’s weakness compared to its US counterpart.

“Overall, I think you’d probably argue it’s a little better, although the stronger US currency is the only thing that adds a bit to the inflationary pressure there.”

How far will the chromaticity go?

All eyes in global markets will be watching Wednesday’s interest rate decision from the US Federal Reserve for clues about how high the benchmark interest rate will be.

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Ashworth points out that higher prices are generally a good thing for currency values, as investors are drawn to markets where they will get better returns based on higher interest rates.

“When you raise your interest rate in a country, you usually expect to see the currency strengthen,” he says.

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Ritz says the Bank of Canada’s relative toughness on this front has been a boon to the insane.

“On a relative basis, we’re not doing all that bad because Canadian interest rates are also rising. The Bank of Canada has been among the most aggressive central banks,” he says.

A lower-than-expected inflation reading in Canada on Tuesday is one possible reason for the Canadian dollar’s edge to fall 0.8 percent on the day, as Reuters notes that some economists are viewing the data as opening the door to future rate hikes.

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but after that Unexpectedly high US core inflation In August, Ashworth said money markets were locked in a 75 basis point rate hike from the Fed on Wednesday, with a minority of voters calling for a full percentage point increase.

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From that perspective, he says markets could view a 0.75 percentage point rise as “peaceful” – a move that discourages rate hikes and could dump the US dollar somewhat.

But a 100 basis point increase from the Fed is “certainly not impossible,” Janzen notes.

In addition to the number, economists will hear Fed Chairman Jerome Powell’s language about how much higher rates are needed and how quickly it will need to get there. These are all factors that could push the US dollar higher.

Reitzes says this is another factor driving the Bank of Canada, if not fully keeping pace with US interest rate decisions, at least continuing to raise its own policy rate and maintaining Canadian competition.

The Federal Reserve is expected to release its decision on the benchmark interest rate on Wednesday at 2 PM ET.

– Files from Reuters

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