Yo, Canada! Loonie weakens as rates up north come down

The Bank of Canada isn’t buying the "decoupling" talk -- the idea that the global economy is so healthy it can roll along despite the U.S. economy’s woes.

The BOC today slashed its benchmark short-term interest rate to 3% from 3.5%, citing expectations for "a deeper and more protracted slowdown in the U.S. economy."

As the U.S.’s largest trading partner, Canada knew it wouldn’t escape the effects of trouble south of the border. Even so, the BOC is betting that Canada will avoid outright recession, helped by relatively strong employment levels and high prices for many of the raw materials they dig out of the ground up there. The bank is projecting Canadian economic growth of 1.4% this year.

At 3%, the BOC’s key rate still is three-quarters of a percentage point above the Federal Reserve’s benchmark rate of 2.25%. And the Fed is widely expected to cut its rate to 2% when Bernanke and crew meet next week.

One casualty of the Canadian economy’s slowdown has been the nation’s dollar, or loonie. After soaring to a 30-year high against the U.S. dollar last fall -- a great source of pride for Canucks -- the loonie has backtracked. The U.S. dollar bought just 92 Canadian cents at the loonie’s peak in November. Now a greenback buys about $1 Canadian.

Even so, Canada is way more expensive for Americans, including Hollywood film producers, than it used to be. Three years ago the U.S. dollar bought $1.25 Canadian; five years ago it bought $1.50. So filming on location up north still is far from the bargain it once was, which should be good news for industry workers in L.A.

Posted April 22, 2008