The loonie rises and falls with the price of oil not because ours is a petro-economy but because the world thinks it is.
“The exchange rate is the most important price in the economy” is a quote often attributed to Robert Mundell, the Canadian-born, Nobel Prize winning economist. The dollar’s price is so important because it affects everything from the inflation rate, to the propensity of Americans to vacation in Canada, to the competitiveness of Canadian exports in foreign markets.
For the past five years, our exchange rate has been one of the biggest issues in Canadian economic policy. There is probably no advanced country in the world that has experienced such wild shifts in the value of its currency as Canada has recently.
Four years ago our dollar reached parity with the greenback. At the time this was seen as a major problem, particularly for manufacturing firms that exported to the U.S. It led NDP Leader Thomas Mulcair, among others, to claim that Canada suffered “Dutch Disease,” basically the notion that the dollar tracks the global price of oil, and this is bad news for the non-oil tradable sectors when the price of oil is high.
In an effort to quell the Dutch Disease hysteria, then Bank of Canada Governor Mark Carney asserted that the Canadian dollar was not a petro currency. “It is far too simplistic to talk about the Canadian dollar as a commodity currency, let alone a currency that moves consistent with one commodity. This is a much more diverse, complex economy than that,” Carney told a press conference in 2012.
Fast forward to 2016, when the Canadian dollar is now at risk of dropping below 70 cents. In lamenting the low state of the loonie today, current Bank of Canada Governor Stephen Poloz appears to have a different take than his predecessor. Poloz has conceded that we in fact have a petro currency.
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