MNI INTERVIEW: Strong CAD Pressures Fresh BOC Cut- Ex Staffer

Strength in Canada’s dollar alongside continuing U.S. trade threats will pressure the central bank to resume interest-rate cuts next year, former staff researcher Greg Tkacz told MNI.

The Canadian dollar’s rise after Governor Tiff Macklem held rates Wednesday and Federal Reserve Chair Jerome Powell cut a few hours later illustrates the situation, he said. A few more cents of appreciation will harm an economy where firms are cutting investment as Donald Trump uses looming USMCA talks to make new trade threats, Tkacz said.

“The only issue I would see with this pause right now especially with the U.S. dropping (rates) later in the afternoon, is that the exchange rate may not be moving in the direction that would be beneficial to helping us offset the negative shock to our exports,” said Tkacz, who now teaches economics at St Francis Xavier University in Antigonish, Nova Scotia.

Canada's dollar strengthened about a cent against the U.S. dollar Wednesday and is up 3% this year even with the economy shrinking in the second quarter amid the trade war. Macklem held the key rate at 2.25% Wednesday and many economists see the pause lasting through 2026 and some say the next move is a hike. 

Recent data show a resilient Canadian economy with three months of strong job gains and exports rising again after dropping 13% in the second quarter. 

PAUSE FINE FOR NOW

David Rosenberg, known for predicting the 2008 U.S. downturn, said this week he sees CAD gaining to CAD1.30 next year, from CAD1.38 at midday Thursday in Toronto, the first time he's been bullish in years. He cited potential for the Fed to keep cutting while the BOC stays on hold. 

Some currency strength comes from a global shift out of U.S. dollar assets, and earlier this year Senior Deputy Carolyn Rogers said the currency has continued its historical role as a shock absorber. 

“If the Canadian dollar appreciates too much more I think the Bank would have to reassess its decision to pause going forward, so it would have to start dropping rates again," said Tkacz.

Before the trade dispute Canada sent three-quarters of its exports to the U.S. and officials have said a million jobs are at risk in a country of about 40 million people. (MNI INTERVIEW: Supply Damage Supports BOC Hold- Dal's McNeil)

Halting rate cuts after four moves this year and a cycle that began with an overnight rate at 5% still makes sense given inflation pressures, he said. Core indexes are around 3% and the Bank has shifted to a broader definition of trend inflation it sees around 2.5%. 

MORE PERMANENT INVESTMENT SHOCK?

“Interest rates can only go down so far right now, especially with inflation being where it is; I mean real rates are practically negative right now,” Tkacz said. Without making a specific prediction he noted rates could fall another percentage point before officials need to worry about running short of conventional policy room, he said. 

Canada's job market is also being pulled between an immigration cutback that may sustain lower unemployment and hotter wage gains, and the potential hit from U.S. trade threats, he said. Trump has suggested he could abandon a free trade deal with Canada, an issue that could create a long-term investment drop, Tkacz said.

“There will be some costly restructuring taking place, and that’s where you’ll see more substantial job losses, because this tariff will go from a temporary negative shock to a permanent negative supply shock, and I think that’s what the Bank of Canada is very concerned about,” he said. (MNI INTERVIEW: Canada Truckers See Worst Slump In Four Decades)

Financial market setbacks are another sore spot with Canadian stock markets rallying about as much as American counterparts despite the weaker economy, and there is a worrying jump in borrowing by U.S. artificial intelligence firms, Tkacz said.

“If a company like Oracle failed to make debt payments for instance, that could be the catalyst for another financial crisis, and I just don’t know if governments in North America have much appetite to bail out tech firms,” he said.