Could This Crush the Canadian Dollar?
After only a few weeks in office, Canada’s prime minister, Justin Trudeau, has emerged with a plan to save the crumbling Canadian dollar. Whether it will work or not is a different matter. The CAD to USD exchange rate was a major casualty of low energy prices, so is there any way PM Justin Trudeau can help save the Canadian economy?
The question comes at a particularly bad time for the Canadian dollar forecast. Aside from weak prices in crude oil and natural gas, we’ve also just passed through a rate hike from the Federal Reserve. This was no joke: America’s central bank raised interest rates for the first time since before the financial crisis. The move had enormous implications, including negative effects on the Canadian dollar.
By and large, the Fed’s rate hike had a disastrous effect on the loonie. Higher interest rates meant bigger yields on assets that were priced in U.S. dollars, so money flowed south of the border. Canada, meanwhile, couldn’t even benefit from a lower CAD to USD because its exports are focused on natural resources.
The Bank of Canada cut interest rates and threatened to let yields fall into negative territory. Nothing worked. Now I’m wondering if the legislative side of Canada’s governing bodies can do anything to help.
Carbon Prices Weigh on the Canadian Dollar
In his first speech, the young Prime Minister Trudeau highlighted some portions of his agenda as deserving of special attention. One-eighth of his speech was devoted to environmental issues, particularly in reference to a carbon tax policy. (Source: “Justin Trudeau’s throne speech fulfills promises,” The Guardian, December 9, 2015.)
Trudeau tried to sell his carbon tax as an antidote to slow economic growth and economic degradation, which stretches my belief to the breaking point. I should be explicit here: I believe in climate change as a man-made phenomenon, but I also believe in basic economics.
Putting a price on carbon could decimate the oil sands projects in Alberta. That is common sense. Those firms cannot weather the drop from $100.00 to $35.00 oil, while also managing the onset of a new carbon tax. Pretending they can is intellectual heresy.
At the same time, I understand the appeal to environmental security. As a Canadian myself, I can tell that we love our natural landscape. Alberta is home to Banff and Jasper National Parks, Lake Louise, and the only glacier south of the Arctic Circle.
Damaging these natural treasures may be something that Canada would not want to do. That would be the outcome of a democratic decision, but please let’s not pretend like protecting Canada’s environment is somehow going to save the Canadian economy.
Bad News for CAD to USD Exchange Rate
The Canadian dollar is legitimately in freefall. It has lost 20% of its relative value in the last 12 months, meaning that too much money has left the economy. This was a consequence of low oil prices. Therefore, a real fix requires something to fill the gap.
Once again, Trudeau thinks he has a solution.
He wants to implement a stimulus program for Canada that would include a ton of spending on infrastructure projects. By adding some jobs, hopefully he can put a little more money in people’s pockets, so they can pump it back into the economy. (Source: “How Will Trudeau’s pac-Canadian Plans Survive the New Federalism?” Maclean’s, January 4, 2016.)
The businesses that receive that spending could hire new employees to meet the demand, thereby spending money on expansion and adding to the virtuous cycle. But what makes infrastructure a particularly good stimulus bet is that it reduces other costs in the economy.
Transportation becomes quicker and more efficient when infrastructure is modernized. That could be a huge benefit to Canada’s long-term prospects, but I seriously doubt it can reverse the country’s downward slide. The added spending in the economy could help edge Canada towards a recovery, but it may be too little, too late.