EclectEcon

For the past several years, the Canadian dollar had been appreciating in value relative to the US dollar --- until last September (2007). Since then, the US dollar price of a Loonie has been fluctuating around $1.00 or so.

Meanwhile the prices of gold, oil, and other commodities have continued their rise, and these are things which Canada has a comparative advantage in producing. One might expect that as the prices of these resources rise, people wanting to buy them would also bid up the price of the Canadian Loonie. That doesn't seem to have happened, though, for the past 6 months or so, at least not noticeably (There are movements, sometimes large, each day in exchange rates; I am referring here to the lack of a general trend upward — See this site for Bank of Canada data, especially Tables I1 and I2.) In fact, the Euro price of a Cdn $ has fallen, not risen, on average over the past six months, the opposite of what one might expect if, in fact, the Canuck Buck is a petro currency.

So what is happening with the Canadian dollar? Why has its value not been rising relative to the Greenback or the Euro?

My first guess was that the Bank of Canada is stockpiling US dollars, but if they are, the accumulation does not show up in their US dollar reserve numbers which have remained roughly constant since last September. I looked at these numbers because I had wondered whether, in an attempt to cushion the blow of a rising Loonie, the Bank of Canada was engaging in a seriously dirty float, buying US dollars to help hold down the US price of a Canadian dollar. But the data do not seem to bear that out.

Another possibility is that the US Fed is selling Cdn dollars to help support the US dollar to cushion its fall. I haven't checked to see if that is what is happening.

So here is the question:

1. If the value of a US dollar is plummeting on the world markets, and
2. If the demand for the Canadian dollar is rising due to rising commodity prices, then
3. Why hasn't the Canadian dollar risen more against the US dollar (especially during the last six months; also, why has it fallen against the Euro?

Do these trends mean the rest of the world has high inflationary expectations for Canada?

Or do these trends mean that the rest of the world expects interest rate differentials (with respect to Canada) to narrow in the future?

What is going on?

Addendum #1: Earlier this month, Stephen Gordon suggested that the halt in the rise of the Cdn $ is possibly due to the negative balance in Canada's current account, that the drop in exports and rise in imports more than offset the tendency for the Canuck Buck to be a petro currency.

Addendum #2: It also appears that the US current account has moved to a much smaller deficit than it had had earlier. These two addenda combined suggest that the premise of this entire posting is less strong than I expected: maybe the Canadian dollar is less of petro currency than I had originally thought it to be.

Backpatting Digression: For a fun look at some forecasts about what would happen to the US dollar check out this earlier piece, written over two years ago, in which I disagreed with some highly paid analysts.