With the Canadian loonie flirting around parity with the U.S. dollar, and the Federal Reserve undertaking a second round of quantitative easing (QE2) by essentially printing money to buy Treasury securities, there is a favourable outlook for Canadian home mortgage and interest rates remaining at current low rates.
The loonie’s current parity with the greenback is more a reflection of QE2 debasing the strength of the U.S. dollar, however, rather than a “fundamental strength in the Canadian currency,” according to CIBC World Markets chief economist, Avery Shenfeld, as cited in the Calgary Herald.
“The Canadian economy isn’t really, on a fundamental basis, strong enough to live with that exchange rate for now,” Shenfeld notes. “We would need to see a much stronger economy, with even higher commodity prices to justify and sustain that level for the exchange rate.”
The value of the Canadian dollar is somewhat hobbled – even though it is highly influenced by commodities prices, which are a popular current hedge against inflation – due to the close linkage between the Canadian economy, and that of our largest trading partner.
Nonetheless, with the Federal Reserve shooting off all the weapons in its arsenal (including QE2 and an overnight lending rate that remains at 0.25 percent) in an effort to fire up the lethargic U.S. economy, it appears that the Bank of Canada may be compelled to keep its lending rates at current lows in the near term; even though the expressed desire of its governors is to boost rates in the medium term.
The Bank of Canada called a temporary halt to its course of raising interest rates earlier this fall, the Herald notes, when “a slower-than-expected recovery in Canadian economic activity prompted the institution to hold its key interest rate at one per cent.” Now, a loonie at or near parity with the U.S. dollar is likely to keep further hikes on hold, at least in the near-term.
“The larger picture is that a stronger currency, all else being equal, is a bit of a drag on Canadian economic growth,” CIBC’s Shenfeld said. “And is the reason to counter that drag the Bank of Canada is going to take a soft and delayed path toward higher interest rates.”
Canadian homeowners who need to renew their mortgages, or who are considering refinancing a mortgage to take advantage of rates that are still historically low, are likely to have a window of opportunity to do so that will remain open into 2011.
