Our economic future prospects are tied in with events in the United States.
Strength or weakness there inevitably will be translated into a similar framework here.
The performance of the U.S. dollar has a direct bearing on us. A weak U. S. currency is automatically translated into a stronger Canadian dollar. That in turn hurts our exports as a higher valued Canadian dollar makes our products more expensive.
As our exports decline in volume, cutbacks in production and mining inevitably take place.
Therefore, the trends in the U.S. currency have a direct bearing on our economy.
Recently, the U. S. currency has shown unexpected strength. What is the explanation? It has to do with risk aversion. When risky assets like common stocks fail, it tends to go up. Conversely, when risky assets rise, the U.S. dollar goes down.
Since last March the soaring stock market has entailed the steady decline in the U.S. dollar. So far this follows the predictable pattern. This logical turn of events also triggered a rise in the Canadian dollar.
Now the U. S. currency is falling, something that makes it attractive to foreigners as a funding, that is, like a reserve. Yet, the U.S. Federal Reserve System is creating vast amounts of currency and still does not have to raise interest rates to stem the fall in the U.S. currency.
One would expect that so much money printing would weaken that currency, but for the time being that has not happened. Hence, the U.S. has not had to raise interest rates to bolster their dollar. Eventually, reason will prevail.
It is hard to think of a parallel in financial history. A country heavily in debt – about $13-trillion – with consumers burdened by unbelievably heavy debt loads, that is permitted temporarily to get away with low interest rates. Inasmuch as this makes no sense long term, it must (and soon) will break down.
Holders of United States dollars some time will wake up and wish to unload their U.S. dollar holdings, that is unless constrained by the U.S. financial authorities, the Federal System, that raises interest rates sufficiently to stem that flow.
Meanwhile, the weak U.S. dollar will tend to mean a strong Canadian currency. Yet this will come tumbling down, when the U.S. raises interest rates and thereby leads to a major business decline.
All that a bystander can do now is realize that the strength of the Canadian dollar is based on the weak U.S. counterpart. When interest rates rise as they inevitably will, our financial system will cut loose from its mooring. Then, watch out.