Research: Loonie paradox and distorted yield curve

Loonie paradox and how the budget deficit might distort the yield curve

By Erik Norland, Senior Economist, CME Group

Loonie paradox: Does China drive Canada/US dollar rate?

  • China exerts a stronger influence on CAD/USD exchange rate than US
  • China’s sway felt through commodities, which comprise half of all Canadian exports
  • Is Canadian household, corporate debt rising above US levels a concern?
  • Canada’s smaller government debt will allow for fiscal stimulus if growth slows
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Is growing budget deficit distorting the yield curve?

  • Credit crunch at short end of yield curve has raised LIBOR rates vs T-bills
  • At the long end of the curve, T-bill yields are higher than swap rates
  • Distortion of the yield curve can be attributed to growing budget deficit
  • Is the yield curve sending a signal about US economic growth?
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