Running on a renewed high from the rising oil prices, the Canadian dollar appreciated against the American dollar to hit over 1.0225 USD cents to 1 CDN cent. The CDN dollar hit the three year high amidst turmoil in Northern Africa with the potential fall of oil-rich Libya who have reportedly stopped production to the tune of 1/2 to 1 million barrels per day.
The rise also has the Bank of Canada at odds with how it will approach it’s March rate announcement.
Part of the problem is that thet CDN dollar is so high thereby making exports more expensive. Conversely, imports, how far the CDN dollar can go, increase. Businesses generally suffer, however, tourists typically benefit (although after exchange, fees, etc., the difference can still be a loss both ways when converting!)
The Bank of Canada would like to increase interest rates in March in an attempt to slow down risky borrowing in th ehousing market, but also to stem the bigger issue of inflation.
However, to increase the short term interest rate would also put increased pressure on the currency to continue appreciating (as domestic investment tools would become comparatively more attractive with the higher interest rate).
Another issue the BoC has to balance is how the currency has appreciated. Generally Canada’s dollar correlates with the rise and fall of commodities, particularly oil. In the past few months this correlation has been weaker, and the dollar hasn’t followed commodity price fluctuations.