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Jan 7, 2021

Loonie has 'no business' being at 79 cents: CIBC's Tal

Democratic sweep of U.S. Senate is not a complete game changer: CIBC's Tal

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CIBC Deputy Chief Economist Benjamin Tal said he thinks the Bank of Canada should be getting concerned about the atypical strength in the Canadian dollar.

Tal said the broad-market weakness of the American dollar has pushed the loonie to dizzying heights, carrying with it potential headaches for the domestic export sector and economy.

“I think that the Canadian dollar has no business being where it is now, and it’s all about the general weakness of the American dollar,” he said in a Thursday interview. “The fact that I’m worried is not so important, but the Bank of Canada is worried. Clearly they’re worried about it, they’re measuring it more and more. The question is: What do you do about it?”

The Canadian dollar has been trading at just shy of 79 U.S. cents to start 2021, its highest level against the greenback since 2018.

Howvever, Tal said he doesn’t think the Bank of Canada is out of ammunition when it comes to a further interest rate cut. His comments contrast those of the central bank’s governor Tiff Macklem, who has repeatedly declared the benchmark rate is at its effective lower bound.

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    “One possibility, if they’re really desperate, is to actually cut interest rates again to, let’s say, 10 basis points,” he said. “Remember, policy rates in Canada are actually the highest among the Organisation for Economic Co-operation and Development members, so we have room to cut. This is not our forecast, but it’s interesting to think about.”

    The Bank of Canada has essentially signalled that its key rate will remain on hold at 0.25 per cent through to 2023 in a bid to provide ample financial cushioning for the economic recovery. However, it has repeatedly highlighted the rate-fuelled household debt binge as a potential trouble spot for consumers.

    While those concerns persist, Tal said that with interest rates already at historic lows, a small cut would be unlikely to further inflame household balance sheets.

    “I’m not too concerned about debt levels at this point because, quite frankly, when you cut interest rates from an extremely low base, another 10, 15 basis points will not make a huge difference. Quite frankly, it would be more a currency story,” he said.

    Ultimately, Tal said he thinks the threat of a further rate cut could be more effective in tamping down the loonie than actually going ahead with one.

    “The issue is if the Bank of Canada moves, and nothing happens, and the loonie continues to go up; that’s when you realize that the Bank of Canada is unable to do anything,” he said. “Sometimes saying that you’re going to use this weapon is more effective than actually using it, and I think that’s more or less where we are now.”