The Canadian Dollar Hits the Glass Ceiling

The Canadian dollar is soaring, and it seems as if nothing can stop it. The dollar is trading close to its 30-year high, and it was almost catapulted when Canada’s retail sales numbers came out a couple of days ago, soaring 2.8% from April to May.

Our employment numbers are also skyrocketing, completely confusing economic doomsayers. Basically, with more income, Canadians have gone shopping; buying homes, cars, shoes, curtains — anything and everything. According to Statistics Canada, such an economic pace cannot be blamed only on Alberta. It seems everyone in Canada is contributing to the country’s GDP. As a result, economic forecasters have increased their Q2 annualized GDP growth to three percent or more.

Such vigorous spending is also likely to impact interest rate forecasts. A few weeks ago, I told you that I don’t think rates will be going up in September, in spite of the general consensus that the Bank of Canada is just getting in gear. But with such strong retail sales numbers, which, by the way, no one really expected to be this good, Canada’s central bank might not have any other option but to curb their enthusiasm a little and hit us with higher costs of borrowing. The only thing I like about it is that as long as such sentiment exists, the Canadian dollar will continue to approach parity with the U.S. dollar at unprecedented speeds.

I have to say Canada has not seen such healthy retail numbers in two decades. Only this time, it looks like more money will be spent for a longer period of time. What is adding the fuel to our accelerating economy? Five factors: high employment, higher wages, a strong dollar, demand for commodities, and strong stock market performance.

Elaborating further on the last factor, while the hollowing out of Canada’s corporate landscape is not something I can relate to in positive terms, there is a silver lining in the fact that stockholders of companies that have gone through mergers and acquisitions have also found themselves with excess cash on their hands. Not being able to buy shares of companies they like, investors have likely turned their cash into something else, such as a new car, house, remodeling project, vacation, etc.

But at the heart of the Canadian dollar’s spectacular performance is the growing confidence among consumers when it comes to their jobs and earning powers. And while interest rates may increase in the fall, we are still operating with lower rates, which only adds to the overall consumer optimism that additional spending can be supported by affordable debt.

Of course, before anyone gets too heady and crowns retail sales as the sole reason for the dollar’s latest performance, let’s remember that the retail sector is notoriously unreliable, that a repeat of May numbers may or may not happen, and that retail sales have never been considered as one of the main economic driving forces. It is just that in the overall positive economic context, strong retail numbers have given our dollar that extra push in the right direction.

Oh, and one more thing: The title of this article is “The Canadian Dollar Hits the Glass Ceiling.” This is because although the ride may appear to some as if it could have exhausted all the momentum, don’t forget that glass ceilings are made of breakable material. Once such a ceiling is broken, who knows? The sky’s the limit!