Loonie Climbs as Canadian Economy Strengthens
The Canadian loonie has been rebounding against the U.S. dollar after reporting solid first quarter gross domestic product (GDP) data and hints from the Bank of Canada that a rate hike could be just around the corner. While this suggests the Canadian economy is improving, there is a downside. Rising interest rates will hurt those Canadians saddled with debt. Rising interest rates also means mortgage rates are going to increase too.
When the Bank of Canada meets next on July 12, it is widely expected that Governor Stephen Poloz will announce a rate hike, especially after saying in an interview that ultra-low rates have done their work to repair the Canadian economy.1
In the first quarter of 2017, the Canadian GDP advanced 3.7%.2 Over the same timeframe, the U.S. economy limped along at 1.4%.3 Poloz noted that he expects the pace of Canada’s GDP to moderate but stay robust. Meanwhile, in the U.S. the greenback remains near eight month lows following the release of mixed first-quarter GDP and weekly initial jobless claims.
After Poloz’s comments, the Canadian dollar climbed to a four-month high of $76.83 USD. That also represents a 5.5% increase over lows of $72.50 USD in early May.
A strong Canadian economy is obviously a good sign for the country. But there is a downside to this growth. Canadians are addicted to ultra-low interest rates. Canadian household debt levels remain near record levels as mortgage debt continues to climb. For every dollar of disposable income, Canadians owe $1.67 in debt. Mortgage debt makes up the majority of debt, at 65.7%, up from 65.5% in the fourth quarter of 2016.4
If the Bank of Canada raises its key lending rate, Canada’s big bank will raise their prime rates. This will drive up the cost of variable mortgages and other loans and lines of credit that are tied to the benchmark rate.
Keep in mind, nearly half of all Canadians are living paycheque to paycheque and may not be able to afford any kind of rate hike. Roughly half (48%) of Canadians say it would be difficult to survive if their pay was delayed by just one week. And 25% couldn’t come up with $2,000 if an emergency arose.5
Of course, the Bank of Canada will only continue to raise rates if the Canadian economy continues to churn out strong economic data. But even that is open for debate. Over the two decades leading up to the 2008/09 financial crisis and recession, Canadian GDP growth averaged 2.7% annually. Over the next 20 years, Canadian GDP is expected to average just 1.8%.6
By all accounts, it appears as though Canadians are going to have to get used to higher interest rates and historically lower economic growth. All of which will have a huge impact on the finances of the average Canadian and Canadian businesses.
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There may be signs that the Canadian economy is improving, but higher interest rates could have a significant impact on those Canadians saddled with debt. It could also lead to higher mortgage rates as early as July 2017. This opens a huge window of opportunities for those betting on or against the Canadian economy. That’s because the professional traders at Learn-To-Trade.com can show investors how to make money on the Canadian economy, Loonie, and Canadian stocks whether the economy is hot, cold, or tepid.
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- “Canada’s growth to moderate after strong showing, but will still remain ‘above potential,’ says central bank governor,” cnbc.com, June 28, 2017; http://www.cnbc.com/2017/06/27/bank-of-canada-governor-poloz-on-economy-growth-to-moderate-but-will-remain-above-potential.html.
- “Canada’s economy grew at 3.7% pace in first quarter of 2017,” cbc.ca, May 31, 2017; http://www.cbc.ca/news/business/canada-gdp-1.4139075.
- “National Income and Product Accounts Gross Domestic Product: First Quarter 2017 (Third Estimate),” Bureau of Economic Analysis web site, June 29, 2017; https://www.bea.gov/newsreleases/national/gdp/2017/gdp1q17_3rd.htm.
- “Canadian Household Debt Ticks Lower, But Still Near Record High,” Huffpost web site, June 14, 2017; http://www.huffingtonpost.ca/2017/06/14/household-debt-canada_n_17094238.html.
- “Nearly half of Canadians are living paycheque to paycheque — and that has big consequences for retirement security,” Financial Post web site, September 15, 2016; http://business.financialpost.com/personal-finance/retirement/nearly-half-of-canadians-living-paycheque-to-paycheque-and-that-has-big-consequences-for-retirement-security/wcm/31330057-2e5c-434c-b572-2268537e62e1.
- “Canadian Outlook Long-Term Economic Forecast: Mid-Year Update—2017,” Conference Board of Canada web site, June 28, 2017; http://www.conferenceboard.ca/e-library/abstract.aspx?did=8944.
Photo Credit: iStock.com/belekekin
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