The Soaring Loonie and Improving Canadian Economy

The improving Canadian economy has got a target in its sights as the country moves towards 2010 with its recession seemingly an ever-dimming memory. That target is the US dollar, which is very nearly in reach of parity with its Canadian counterpart. The strengthening loonie is the latest indicator of an improved national economy, and is a source of a great deal of interest at ground level – not least because it may lead Bank of Canada governor Mark Carney to puncture expectations that he will keep the interest rate at a record low level. This may be a good time for anyone considering taking out a loan to take the plunge.

Carney made the commitment earlier in the year to keep the interest rate at a quarter of a percent until the middle of 2010. This commitment was made at a time when the economy desperately required stimulation, and that kind of stimulation seems to have been provided, and boosted the economy to the point where, paradoxically, a lower interest rate may be difficult to sustain, and where a rise in the interest rate in order to stabilise the climb may be necessary. Carney has pointed out that that pledge was specified at the time to be “an expectation” rather than a specific promise.

This speculation has been heightened in the wake of Australia’s Central Bank deciding to increase its interest rates in the wake of successful stimulus spending in their economy. The number of economies announcing positive results in the last few months has led to a note of caution being sounded with regard to over-optimism in the immediate aftermath of a recession. The US dollar is falling against most currencies, and with the loonie having picked up three cents against its American counterpart it means that the two currencies are now close to absolute parity.

Currencies are given to movement of extreme nature, which can cover a long way in a short time, and when momentum gets behind one and against another, there can be extreme financial consequences. Not wanting to be taken by this momentum to a runaway economy, it would make sense for the Bank of Canada to work in the interests of stability by raising interest rates. Though this may not be popular with borrowers, neither is market instability.

Cheap borrowing for those with the means to get it has been one positive aspect of the largely negative global financial crisis. The return to relative normality, or at least the effective end of the global recession, was always going to have an impact on the level of interest rates. Should the loonie hit parity with the US greenback, there would be little problem, but too much of a change too quickly might have results that would be negative for al parties. Paradoxically, higher interest rates may give the currency at least an initial boost, and given that the central bank has made clear its concern that the Canadian dollar may move too quickly, they have a tough decision to make.

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Consumer Confidence Is Important

For the seventh month in a row – almost unheard of in a global downturn – the consumer confidence felt by surveyed Canadians is on the increase. This was the finding of the latest monthly survey from the Conference Board of Canada, which found that, based on a fairly complicated index of statistics and consumer response, the confidence of Canadians with regard to potential future jobs and larger-scale purchases has rises by two and a half percentage points to break the 90% mark (at a total of 90.9%). Meanwhile, south of the border in the United States, the level of consumer confidence sits at 53.1%. This is due in no small part to the deeper nature of the recession in the States – an economy which is showing recovery, but later and slower than that in place in Canada.

Of course, although these statistics sound great for Canadians and less so for the American public, there is a reason that they are not trumpeted as broadly as harder financial figures. The clue is in the wording of the results and indeed the questions asked. “Confidence” and “sentiment” are hard things to measure exactly. The indices used are based on a lot of different data, and prone to be skewed by false confidence or misguided bullishness depending on the prevailing public opinion of the time. Another survey entirely, carries out by the University of Michigan in collaboration with Reuters, puts the US numbers up at 73.5, on a rise and therefore going in a completely different direction from those of the US Conference Board. Which is right? Possibly both, possibly neither, it depends on the questions asked among many other variables.

However, this is not to say that consumer confidence is unimportant. It most certainly is not, in fact there is a great deal to be said for having a consumer force out there who are confident of earning and ready to spend some money. This in itself helps drive recoveries, and if belief can be spread at such a crucial time it is not something that we should be cynical about. Of course, we’re talking about finance here, so there is going to be cynicism – indeed, if you could bottle a sneer and sell it, the entire global economy could be expanding by multiple percentage points tomorrow – but the knowledge that people are ready to start making purchases again is certainly something to be pleased about.

The pattern of skepticism in our world is something that makes it difficult to read anything into any package of figures released – and more so when the figures contradict each other so frequently. It would be interesting to fast forward into 2011 and see if people are still as dubious about the recovery and how it will hold then. Perhaps this tougher crust will at least enable us to see the warning signs ignored by so many when they were being waved frenetically a few years ago. If not, then this crisis has taught us nothing. What we seem to be seeing in the latest figures is encouraging in that respect – a guarded optimism that takes nothing for granted.

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