Canadian Dollar Strengthens on Expected Rate Announcement

The Canadian dollar – AKA the “loonie” – opened higher Monday as expectations grow that the Bank of Canada will raise rates later this week. On Friday, the loonie fell to 94.52 US cents, it’s lowest point since July 7th, but quickly rebounded to 95.00 cents by 8:45am this morning.

The Bank of Canada was the first G7 central bank to increase interest rates when it lifted the benchmark lending rate by 25 basis points to 0.50 percent last month. Analysts are predicting another 25 point increase tomorrow when Governor Mark Carney is scheduled to release the Bank’s monthly interest rate statement.

While Canada’s recovery from the global recession has led the way for the G7 countries, dark clouds remain on the horizon. The main concern is that the US recovery is advancing at a much slower rate than anticipated, with unemployment stubbornly remaining in the 9.5 percent range. The American economy’s inability to provide jobs to the millions now facing the expiration of their unemployment benefits, further threatens to deteriorate spending and could slow the recovery even further.

For Canada, the spill-over effect could prove detrimental. The US is Canada’s largest trading partner, with approximately 75 percent of Canada’s exports finding their way south to the US market. If American consumers reduce their spending as a result of high unemployment and other concerns, Canada will likely see demand for its products decline.

It is this longer-term uncertainty that is tempering Canada’s growth expectations. The questions surrounding the US recovery have some analysts suggesting that if the Bank of Canada raises rates as expected tomorrow, the Bank could very well resort to a “wait and see” approach for the remainder of the year.

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