Canada’s poor productivity will force loonie lower

Troy Media – By Will Van`t Veld

American financial innovation might have had a bad ending, but other areas of the U.S. economy have been far more successful. Trends in productivity levels in the U.S. have improved markedly, especially vis-à-vis Canada, and this is a big reason why an exchange rate above par causes serious concerns.

Producing more with less is ultimately what we refer to when talking about productivity growth. Trade then allows production to gravitate towards the most productive sources. Specialization between countries begins to occur and trade renders everyone better off. Shifting productivity differentials then change the terms of trade over time, altering this balance.

Foreign currency is needed in order to facilitate trade, meaning its price, the exchange rate, will be influenced by whether or not the trade balance is positive or negative.

For instance, as energy generates so much of Canada’s net exports, it’s pretty intuitive to see why there tends to be a rush to purchase Canadian currency when the price of crude increases.

Countries also trade in securities, such as national debt, for which currency has to be purchased, but here its interest rate differentials and other investment concerns that matter more.

Much is going wrong in the U.S. economy, but manufacturing isn’t one of them. In fact, the Institute for Supply Management has export orders at 20 year highs. In fact, Ontario has even become a net-importer of U.S. lumber.

There’s a lot going on right now working in the loonie’s favour, but at least one important factor – productivity – will provide some headwind for the high flying loonie going forward.

Tags: Loonie, USA

Category: Canada