With a trade war battering the economy and the Iran war stoking inflation — it’s not as if the Bank of Canada didn’t have enough to worry about. Now there’s a “leaky loonie.”

The Canadian dollar has “sprung a slow, but fairly steady leak” against the U.S. dollar, said CIBC chief economist Avery Shenfeld in a note.

And if the U.S. Federal Reserve hikes its interest rate this month or in December, the loonie could sink even lower.

Since early last summer, Canada’s currency has lost about 5 per cent of its value, falling as low as 70 U.S. cents this month. It was trading at 70.91 this morning.

Much of the decline has been about the strength of the U.S. dollar, but the loonie has also slid against most other major currencies, sitting at multi-year lows against the British pound, euro and Australian dollar.

This past week, our currency’s effective exchange rate fell to its lowest level since the 2016 oil price shock.

So why is this important to the Bank of Canada , which decides on interest rates Oct. 28?

A weaker exchange rate raises the price of imports, fuelling inflation , and supports growth through cheaper exports — ingredients for tighter monetary policy, said CIBC.

The decline so far, which could potentially add around 0.3 percentage points to inflation, is “clearly nothing to panic over yet,” said Shenfeld.

“That said, it is a reminder that, while the Bank of Canada often lets the Fed do rate hikes that it doesn’t match, if that feeds into a large enough exchange rate depreciation, it can push inflation up enough to spur the BoC into action on rates.”

Capital Economics said the weaker Canadian dollar adds another layer of complication to the central bank’s decision.

Consumer goods import price inflation is already at 8.6 per cent, and further weakness in the currency if the bank does not respond as aggressively as its peers risks pushing it higher still, said Thomas Ryan, senior North American economist at Capital.

Though odds of the bank hiking at the end of the month have fallen below 30 per cent, Ryan thinks policy makers will be reluctant to sound too dovish at upcoming meetings for fear of pushing the loonie even lower.

There is a case where a weak Canadian dollar could benefit the economy, but it’s a worst case. If Canada, U.S. trade tensions escalate and Donald Trump carries out his threat to impose a 50 per cent tariff on Canada’s auto industry on Jan. 1, and at the same time energy prices cool, the Bank of Canada might not be looking at a rate hike next year, but a rate cut.

In that case disinflation in a weaker economy could use the inflationary boost of a lower currency, which would also make exports more competitive.

However, if energy prices stay high, and the Canadian dollar loses more ground to a strong U.S. dollar, the Bank of Canada would be compelled to take a more aggressive line on interest rate hikes, said Shenfeld.

So keep your eye on the loonie for clues on the bank’s upcoming rate decisions — and not just our dollar, but the American dollar as well.

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The BofA Bull & Bear Indicator is no longer flashing sell.

The contrarian index dropped sharply from 8.1 to 7.4 this past week, ending the “sell signal” triggered on May 26. Strategists led by Michael Hartnett said the drop was driven by deteriorating global stock index breadth, bearish hedge fund positions in oil and S&P 500 futures and less bullish positioning in gold futures. Weaker high-yield and emerging market debt flows added to the case.

Hartnett said the summer of “extreme bull sentiment” has come to an end, and expects risk aversion to rule markets in coming weeks as investors look for shelter from higher interest rates and volatility around the U.S. midterm elections and the AI trade.

  • Albertans vote today on 10 referendum questions including whether or not to hold a binding referendum on the province leaving Canada.
  • The union representing 9,000 workers at Stellantis N.V. releases results of weekend vote on whether to give negotiators a strike mandate. The future of the carmaker’s Brampton, Ont., plant is in doubt.
  • The Bank of Canada releases its business outlook survey and its survey of consumer expectations. The central bank decides on interest rates on Oct. 28.
  • Today’s Data: Canada’s inflation rate for September, U.S. NAHB Housing Market index
  • Earnings: Fifth Third Bancorp, W R Berkley Corp., Steel Dynamics Inc.

  • ‘We are scared’: Locals say Canadian miner’s Nigerian venture is putting their community at risk
  • Brace for a ‘blowtorch winter’: Super El Niño threatens Canadian gas producers and provincial coffers
  • Canada to boost immigration points for high-wage earners in bid to drive economic growth

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McLister on mortgages

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Today’s Posthaste was written by Pamela Heaven with additional reporting from Financial Post staff and Bloomberg.

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