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Canadian Dollar Valued at 91 Cents USD
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The Canadian dollar is undervalued and its fair value in the long-run is about 91 cents (USD, it was about .895 at time of this post) because of high commodity prices, Bank of Canada researchers say in internal documents. The combination of the strength and 'undervaluation' is due to slow adjustment to oil and gas prices, healthy Canadian economy, and declining American economy.
The internal note to Bank of Canada Governor David Dodge sheds light on why the central bank continued to raise rates during the first half of this year, despite opposition from manufacturers and politicians complaining that the high Canadian dollar was needlessly hurting the Central Canadian economy.
In its quarterly economic outlooks, the Bank of Canada always assumes that the current trading range of the Canadian dollar will persist indefinitely. However, the internal documents show that bank researchers have no illusions that the Canadian dollar will remain static. Over the past year, central bank officials have explained their exchange-rate model has been updated and reformed to reflect the fact that the loonie closely follows moves in global commodities markets.
While the central bank has put interest rate hikes on hold for now, the information contained in the memos suggest that Mr. Dodge would not hesitate to raise rates yet again if inflationary pressure continues, largely from energy prices.
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Aug 11, 2006, 1:29 PM
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