The Chief Agricultural Economist with FCC is advising farmers to be prepared for the impact of increasing interest rates on the value of the Canadian dollar, writes Bruce Cochrane.
Earlier this month the Bank of Canada raised its benchmark interest rate by one quarter per cent, the second quarter per cent increase in less than two months stimulating an almost immediate increase in the value of the Canadian dollar.
J.P. Gervais, the Chief Agricultural Economist with Farm Credit Canada, says as the value of the dollar goes up margins will decline.
J.P. Gervais-Farm Credit Canada
We’ve said for a long time now I would say that oil prices are really the main driver of interest rates in Canada and that’s actually very different now.
The oil prices have stayed around 50 dollars for awhile now.
We had a huge shock to oil prices starting in 2014 but I think now that’s past us and so really now I think the differential between interest rates in Canada and the US is what really matters to set the value of the Canadian dollar with respect to the US dollar.
We’re clearly in the process of raising interest rates in Canada.
That drives the demand up for Canadian dollars.
That pushes the price of the Canadian dollar with respect to the US dollars up again and that’s the reason why we’ve seen the appreciation in the Canadian dollar.
This is significant because the Canadian dollar has had a huge impact on farm income in Canada.
If you look at the situation in the United States, for the last three years it had quite a bit of a slowdown if you look at farm income for example.
Farm income declined significantly over the last three years when in Canada we basically broke record after record when it comes to farm income.
One of the differences, the main difference, has been the fact that our currency for the last three years or so has lost value against the US dollar so that shielded us a little bit from the decline in commodity prices that we’ve seen in the United States.
Mr Gervais says this latest interest rate increase sends a clear signal that it’s time to review financial strategies, examine exposure to risk and consider taking some risk off the table.
Source: The Cattle Site