Canadian dollar value sinks to 4-month low

TORONTO –

The loonie hit a four-month low against the U.S. dollar on Wednesday, but some experts say Canadian consumers shouldn’t expect their wallets to take a big hit.

The Canadian dollar traded at 72.54 US cents on Wednesday, the weakest level in more than five months.

Avery Shenfeld, chief economist at CIBC, said the weak loonie reflected the US Federal Reserve’s more aggressive rate hikes, while the Bank of Canada held its key rate steady for the first time in a year.

While rising import costs could lead to higher prices for items such as food, he said the impact on Canada’s inflation rate should be minimal.

“This is pretty small potatoes in terms of the inflation rate. We’re talking about a decimal here or there,” Schoenfeld said.

“Even if something is an imported product, the import price is not susceptible to all exchange rate changes. It tends to show up in things like fresh fruits and vegetables, but if you’re talking about a t-shirt. department store, it’s probably made outside of North America.”

The Bank of Canada kept its key interest rate on hold at 4.5 percent on Wednesday, based on an assessment of the latest economic data. Schoenfeld noted that the central bank has signaled that it will not respond to a modest further weakening of the currency.

“Given the choice, I think Canadians would be happier not to see another rate hike than to protect the Canadian dollar from falling another cent or two,” he said.

Darcy Briggs, senior vice-president and portfolio manager at Franklin Templeton Canada, said he expects the Loonie to continue trading soft until the US Federal Reserve reaches the end of its tightening cycle.

“It’s about currencies. They make pretty dramatic moves 1/8 fast 3/8,” he said. “They’ll kind of lie in limbo, and then volatility will pick up.”

Briggs said that could make life more expensive at the same time.

“If the Canadian dollar depreciates, and it depreciates against a basket of currencies, any product that we import will by definition be more expensive because we’re paying for it in cheaper Canadian dollars,” he said.

“It will take away consumption and that will actually lead to inflation.”

Angelo Melino, an economist at the University of Toronto, predicted that the difference in interest rates between Canada and the US would last at least 10 months.

But while a weaker loonie could make U.S. dollar-denominated goods more expensive, Melino said the impact on Canada’s inflation rate would not be large.

“They will matter for specific products and services,” he said.

“If you’re going to Florida vacation or Disneyland, you’re going to see it right away.”

If the Canadian dollar stays low for an extended period of time, Melino said, that could cause demand to shift from U.S. goods and services to Canadian ones.

“Both Canadians and Americans will buy Canadian-made goods and services, and that’s good for Canadian products, but also inflationary,” he said.

This report by The Canadian Press was first published on March 8, 2023.