Historically the US Fed Interest Rate and the Canadian Lending rate are more or less in line. We believe that this is about to change and the implications for the Canadian economy could be interesting.
It may not happen in the near term, although recent declines suggest otherwise, but for a number of reasons, the Canadian dollar might well be in trouble. Much like our previous article about the difficult position the Canadian central bank faces, the CAD faces some seriously negative macroeconomic forces.
The Bank of Canada is in a very difficult position because of House Prices for a number of reasons. It is our current thesis that they are stuck between a rock and a hard place. The rock being the need to raise interest rates to combat inflation and a sinking Canadian dollar and the hard place being the massive housing bubble and huge levels of consumer debt in Canada. Some of these difficulties are also faced by central banks around the world and some are uniquely Canadian.