4 Reasons Why the Loonie Is Going Strong

Wondering why the Loonie is appreciating even if oil prices keep dropping? Let’s see if the secret of its strength lies in Canada’s latest economic figures.

1. Inflation

Did you know that Canada has chalked up three consecutive months of stronger than expected CPI readings? While a part of this was dismissed by Bank of Canada Governor Poloz as an effect of the Loonie’s depreciation a few months back, he recently acknowledged that the pickup in inflation was a result of actual economic improvements.

In fact, the increase in price levels for the month of October was enough to push the country’s annual inflation rate to 2.4%, way past the central bank’s 2% target. This also led to a few murmurs about policy tightening early next year, as Canada currently holds the highest inflation rate among the developed economies.

2. Spending and production

Leading indicators suggest that businesses and consumers are faring well, as both manufacturing sales and wholesale sales figures came in much stronger than expected. For the month of September, Canada reported a 1.8% jump in wholesale sales, more than twice as much as the estimated 0.7% gain. Manufacturing sales picked up by a whopping 2.1%, higher than the projected 1.3% increase.

These figures reflect healthy local demand, as businesses ramped up production possibly in anticipation of stronger consumer spending. If this pace is sustained, companies could also hire more employees and expand their operations later on.

3. Employment

As it is, the employment situation in Canada is looking a-okay, as the economy added 43.1K jobs in October and brought the jobless rate down from 6.8% to 6.5% – its lowest level in six years. Analysts had actually expected to see a 3.1K drop in hiring and no improvement in the jobless rate.

This marks back-to-back impressive hiring gains for Canada, as it reported a 74.1K increase in employment for September. Of course a couple of data points don’t make a trend, but this was enough for several market participants to speculate that the Canadian jobs market is starting to make a strong recovery.

4. Trade Activity

Last but definitely not least is Canada’s trade balance, which also surprised to the upside for the month of September. Instead of reporting a wider trade deficit of 0.7 billion CAD as many expected, the actual figure showed a surplus of 0.7 billion CAD!

A closer look at the components of the report reveals that exports grew by 1.1% while imports fell by 1.5% during the period. The strong gain in exports was led by an increase in motor vehicles and parts shipments, along with consumer goods. The fall in imports was mostly a result of a 5.8% drop in products bought from other countries outside of the U.S., particularly in crude oil.

In a nutshell, it appears that Canada is doing mighty fine and may be facing the possibility of monetary policy tightening sooner or later. Do you think this is enough to keep the Loonie supported? Share your thoughts in our comments section!