Canadian dollar and the Bank of Canada

 May 20, 2007 (an additional note May 21, 2007)

The rise yesterday of the Canadian dollar to 91.85 cents US
will complicate interest rate setting at the Bank of Canada. If the Bank raises the rates this will only fuel further rises in the value of the dollar. Each time the dollar rises this will kill off further key employment sectors in manufacturing that are export oriented unless the industry imports substantial inputs from the US. Canadian manufacturing is already in a slump having lost 1000s of jobs over the past two years. Since 2002 manufacturing has lost 149,000 jobs of which 74,000 disappeared in Ontario. Québec has lost the second biggest chunk of these jobs.
Richard Paton, the President of the Canadian chemical Producers 's association has an article in the Globe and Mail Report on Business(May 21, 2007, p.B2) which corectly points out the key importance of manufacturing to Canadian economic well being.`"We are a resource rich nation, and we should be creating valuable products from our natural resources instead of shipping them raw to be upgraded elsewhere. Many countries undertand the importance of our natural resources, which explains why so many resource companies are being purchased by international buyers."

Paton's priorities are the correct ones if we intend to ensure a bright economic future for ourselves and our children and grandchildren. Otherwise we will continue to be stuck as a hewer of wood and drawer of water and extractor of minerals and petroleum and natural gaz.Given our ingenuity and technical competence this would be an abdication of our historical destiny. But to achieve it we need the right mixture of industrial and monetary and fiscal policy.

The latest retail sales data for March suggested a higher than expected rise in sales.

But if one examines the data carefully part of the surge was in the sales of gasoline stations whose sales are inflated by the sharp rise in gas prices. Hence, it is misleading to view higher sales in this area as indicative of a boom in the economy. As well retail sales rose only 0.6 % in Quebec as opposed to over 5% in Alberta and over 2% in Ontario.

The inflation rate remains at 2.1 % and the unemployment rate at 6.1%. Hence I believe it would be very unwise for the Bank to raise its trend setting overnight interest rate. Doing so would only help ensure a rough landing for the economy.

The Canadian dollar was trading on Monday May 21 at 92.2 cents US. An Elliot wave theorist, a technical analyst at Goldman Sachs, Kevin Edgeley was predicting that the dollar would hit 96.2 cents US in the coming weeks.(See Bloomberg news reportage on currencies)

If this turns out to be true (hard to know since technical analysis is inherently risky presuming that past experience is an accurate predictor of future experience)   and the price remains stable for any period of time the Bank of Canada must act before such a strong dollar does too much harm to our manufacturing