Canada: Weaker CAD really desirable? - NBF

Krishen Rangasamy, analyst at National Bank Financial, points out that after a decade of red ink on the current account, some have advocated for a weaker Canadian dollar to restore Canada’s external balance.

Key Quotes

“The argument is that a cheaper loonie would rekindle exports and hence give a boost to the current account. But if the last five years are any guide, such depreciation may not have the desired impacts.”

“Besides reducing incentives among exporters to become more competitive, a weaker Canadian dollar would tend to increase imported inflation and prompt our inflation-targeting central bank to keep monetary policy tighter than would otherwise be the case. More importantly perhaps is the negative impact a weak currency can have on investment and hence potential GDP.”

“Latest data from Statistics Canada shows a sharp increase in the price of machinery and equipment in 2019Q1 (+6.2% year-on-year) driven by the imported component (+7.3% year-on-year), the latter surging amid the loonie’s depreciation over the past year. And that’s restraining business investment.”