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Weak dollar raises import prices, force Canadians to shell out more for food

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Jan 15, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

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    FXStreet (Mumbai) - Bank of Canada Governor Stephen Poloz in his speech at Ottawa today asked Canadians to get used to a cheap dollar. The Canadian Dollar is also considered to be a 'Commodity Currency' given the fact that Canada is extremely resource rich and a sizable portion of the country’s income comes from mining and exporting resources, particularly oil. Thus, with oil hovering around $30 per barrel threshold it is not surprising to see the loonie facing downward pressure. Gasoline prices declined 10.6 per cent in November from a year earlier, less than the October rate of 17.1 per cent.

    "It is not a coincidence that the Canadian dollar is about where it was back in 2003 and 2004," Poloz said, "oil prices are also about where they were back then." He noted that falling commodity prices were draining $50-billion (Canadian) and reiterated that the weak Canadian dollar was the result of the extremely low commodity prices. Lower currency value, it seems will be a norm for some time as it continues to stomach the impact of falling commodity prices.

    The lower Canadian dollar has helped to keep Canadian goods and services competitive and the foreign demand stable. This in turn has supported domestic production, thereby boosting employment and increasing income. In the backdrop of oil price slump, keeping the loonie weak helped he labor market to be resilient. Annual employment is noted to have strengthened more in 2015 compared to the two previous years. “Movements in exchange rates are helping economies, including ours, make the adjustments that must take place,” Governor Poloz said.

    One might wonder where then lies Canada’s problem. The situation here is a little complicated. On one hand, we see low interest rates and weak Canadian dollar helping the economy to compensate the losses suffered on account of low commodity prices. On the other hand Canada is faced with the problem of growing inflation. Consumer prices in Canada went up 1.4 per cent year-on-year in November of 2015 on the increase in cost of food and shelter.

    Food costs climbed 3.4 per cent as fresh vegetables and meat became more expensive. One look at their grocery bills and Canadians will realise the impact of growing inflation. The Canadian dollar fell below 70 U.S. cents for the first time since May 1, 2003.

    Given that Canada imports about 80 per cent of the fresh fruits and vegetables consumed by its citizens, a weaker currency will imply people have to shell out more to purchase the food items. With its lower income household forced to spend larger part of their income on buying food items. The weak Canadian dollar has raised import value of a wide range of goods. Imports have thus become more expensive for the Canadians. Governor Poloz admitted “The depreciating currency means higher prices for imported goods and services”. He however added that “Core inflation is overstating the underlying trend of inflation in the economy”. The core inflation rate that excludes eight volatile products slowed to 2 per cent in November from 2.1 per cent recorded previously.

    Governor justified the central bank’s attempt to keep the dollar low, saying "The depreciation of our currency is a natural part of the process". Also, it was evident from Poloz’s speech on 7th January that the central bank did not wish to follow its US counterpart with respect to interest rate hike. It cannot be denied that the BoC’s decision to raise the rates or intervention in the foreign exchange market to support the falling Canadian dollar will for sure make good and services produced in Canada less accepted in the world market. On the other hand, the BoC is under the pressure to wake up to flipside of a weak dollar which has spiked prices of a wide range of goods.

    It will thus be interesting to watch the central bank’s future course of action. The BoC will meet on 20th January to decide on rates. It had kept rates unchanged at 0.50 per cent in December concluding that “the risks to the outlook for inflation remain within the zone for which the current stance of monetary policy is appropriate”. However, now that the Canadians have to spend more given that the weak dollar has raised prices of most items, it will be interesting to note which path the central bank chooses to take.
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