If I Were Mark Carney
Loonie hit the 97.20 last week, and foreign traders raised their voices on the overvalued currency (?), the economy is bouncing back, raise the interest rates, cool down the loonie, etc. Tonnes of ideas were hitting the headlines of Financial Post, Globe and Mail every day.
However, I think rising interest rates will not help the CADUSD parity. Let’s put it this way, an increase in the interest rates will raise the yields in the bonds. In other words high yield currency will attract foreign investors which will lead to appreciation of CAD USD parity.
Of course foreign currency is determined by the price level differentiation between domestic economy and the foreign economy in the long-run, in the short-run it is determined by the interest rates.
If I were Mark Carney, I would not raise the interest rates until I see the strong growth indicators, such as GDP growth combined with, raising employment levels.
Last but not least, I never believe the percentage increases lately, they look attractive, %46 increase compared to last month, quarter or year I read sometimes. And I wonder of course when you hit the bottom, such as 1, getting to 2 means %100 increase. If you were at 100 and same amount increase will translate as 1% increase. Well, same thing different colors. So be careful with the growth rates nowadays.