Politics, Economics, Gas Prices and Our Lovable Loonie

Last year at this time our Canadian dollar was showing us just how much testosterone it could muster.  The dollar topped out at 91.05 cents last June and has been on a downward spiral ever since.  Ever since though is long gone.  Since reaching lows in the 84-cent level in January our loonie has caught wind.  Last Monday it reached 88.42 cents US.  What’s with this Canadian dollar?  Is it like the rest of us after a long winter, feeling spry with the warmer weather?

If you want a clue to what is going on with the loonie check those gas prices.  When gas creeps up over $1/litre, it seems our loonie, which doubles as a “Petro-dollar” catches some wind.  So if you can makes sense of the gas prices, maybe you can make sense of the loonie.  For manufacturers and farmers in Chatham-Kent, a higher loonie is never good news.  Finding clues on its future path is a million dollar question.

So if oil goes up so does our loonie. Does that mean when the Iranian Revolutionary Guard capture several British seamen our Canadian dollar catches some wind?  It would seem so because in the wacky, wacky world of oil prices, almost anything passes as an excuse for a price party.  It would seem now the time is right for a retreat on oil prices.  With oil trading in the $63 dollar range, we can only hope.

The key might be the Bank of Canada.  If you’ve been counting the days until the Bank of Canada cuts or raises interest rates, you’ve been disappointed.  I know, measuring your moods on Bank of Canada gyrations is what most of you think of doing first.  However, I digress.  Us economist types live for this stuff.  So at 4.25%, the Bank of Canada remains fixed on keeping this rate stable.  Nonetheless, they will find it hard not to cut interest rates if the loonie keeps going into this rare air.

I bet they cut rates especially if we head back into the 90-cent range.  I cannot see how they can sit idly by with a strong loonie shrinking the job base.  However, we’re not there yet.  We’ll see.  With our federal government currently drunk of spending money, inflation fears could surely raise its ugly head.  That could force the Bank of Canada to act the other way.  Raise those rates and fight inflation.  There are lots in the mix.

About that government being drunk spending money.  This past week we found out that we were buying and leasing some tanks for Afghanistan.  That is only one part of our huge federal government expenditure spree.  Afghanistan is very expensive and the true cost of it might be just warming up.  8 Canadian deaths over the last few weeks have only added to the true cost of this war.  We don’t know what the Taliban have in store for this summer.  Those costs may rise even higher.

All of this can be inflationary.  We have been somewhat immune from this over the last several years because of the expanding economy, oil prices and the monetary policy put forth by the Bank of Canada.  However, the Harper government is spending a lot, which may serve as a precursor to an upcoming spring federal election.

Last week at the Dresden Rotary Banquet, guest speaker Liberal MP Garth Turner said he expected that to be called within the next two weeks.  My question is what for?  Anybody who can do a little arithmetic knows in our five party parliament there is little chance of anybody getting a majority.  On the flip side, it would seem Stephen Harpers minority government is pretty safe.  After the defeat of the sovereignists in the Quebec election, Bloc prospects aren’t great.  So they’re supporting the Conservatives.  Give me one good reason for a federal election?

Can’t do it can you?  Something tells me Stephen Harper might be thinking the same.  In modern politics it’s all about the focus groups and the overnight polling numbers.  Harper knows he can’t win a majority.  His opponents know that too.  I say a federal election is far off.

Then again, I don’t have a monopoly on the stupid meter.  Politicians don’t ask my advice so maybe their plans are coming together.  The economy on the other hand continues to hum along with nary a naysayer.  Ditto for the loonie.  What’s easy is saying it’s going to 90 cents.  What’s more brave is saying its going to 79.  Realistically speaking, nobody knows.  That over the next few weeks should keep it interesting.