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The Canadian Dollar’s Performance and Its Impact on Federal Elections
The value of the Canadian dollar has been a significant factor in past federal elections. In 1963, the Diefenbaker government lost office after the devaluation of the dollar from parity to 92.5 U.S. cents.
Similarly, the dollar’s decline to 61.8 U.S. cents in January 2002, following weak commodity prices and global uncertainty, was a factor in past federal elections. After reaching parity during the Harper years, it fell to below 80 U.S. cents when commodity prices collapsed after October 2014.
Factors Contributing to the Canadian Dollar’s Weakening
Several factors contribute to the weakening of the Canadian dollar. Commodity prices play a significant role, as resources account for over half our export earnings. Political risk also plays a part, and investors may prefer American to Canadian bonds if real interest rates stay higher in the U.S.
Increased private and public indebtedness to other countries also puts pressure on our dollar, as investors become more concerned about our ability to service that debt. The IMF expects Canada’s balance of payments to weaken further even beyond this year.
Prognosis for the Canadian Dollar
The oil prices are likely to soften due to falling Chinese demand and an oil supply glut. The U.S. Federal Reserve is not expected to cut interest rates as much as the Bank of Canada has felt necessary, given our weaker economy and lower inflation forecasts.
Our indebtedness continues to grow, which will put additional pressure on our dollar. If real interest rates stay higher in the U.S., investors will prefer American to Canadian bonds.
Possible Consequences
If the loonie falls further this year, that will be another negative in Justin Trudeau’s legacy. Canadians don’t want a declining currency, and it will be one more economic challenge for him to address.
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