Savings Rates in Canada - Going up?

[bbarberayr]

Kind of anecdotal, but seeing more advertising for savings rates these days.

 

https://www.meridiancu.ca/personal-banking/Offers/OOP/1percent.aspx?utm_source=google&utm_medium=cpm&utm_campaign=2016FallDesposit&gclid=CIXz-cOI2M8CFQqqaQodEKMPHQ

https://www.eqbank.ca/personal-banking/features-rates?utm_source=google&utm_medium=cpc&utm_campaign=EQB_HISA&gclid=Cj0KEQjw4fy_BRCX7b6rq_WZgI0BEiQAl78nd_yU2s5D64uhiSR2DZzVlFNwNlhQSjNceeQrk1zYO4saAsno8P8HAQ

 

Could be just related to what I've clicked on, but if it is a trend, it is a good indicator that the rate rises we've seen in US treasuries and bonds is flowing through to savers and that is a good sign that the rise in rates is sticking better this time.

 

Any thoughs?

 

[rukawa]

I would guess rates are going down. My understanding of the new mortgages rules was that part of the reason was to be able to lower rates without pumping up house prices.

[scorpioncapital]

because canada allows large access to US markets, I'm not sure this is a great thing for the country as how can they hold down rates, sell debt, and invest in the economy if people want US products out of the country? It almost is the same as the emerging market problem with Canada as being an emerging market and capital flowing out as policy divergence continues.

[rukawa]

Yes your right of course. Policy divergence is limited because as the US raises rates the FX rate rises and a large number of imports in Canada rise in price. So the Canadian rate will tend to ultimately follow the US rates with some lag. The logical course of action given this fact would be to form a currency union since the benefits of this policy for trade are much larger than the disbenefits of eliminating the already limited ability of Canada to have divergent monetary policy than the US.

 

But then the question is how much will the US raise rates. Every time they do the stock market reacts really badly and they back off. We will see.

[rb]

Always love it when people talk about currency unions when they haven't the slightest clue about optimal currency areas.

[rukawa]

Always love it when people talk about currency unions when they haven't the slightest clue about optimal currency areas.

 

I feel like instead of making this remark it would have been better if you just explained what an optimal currency union is, what evidence there is that an optimal currency area is in fact really optimal for a currency union and then finally why Canada/US is not an optimal currency area.

 

As for my argument for why US/Canada should form a currency union, its based on a simple fact: the biggest advantage of an independent currency for Canada is the ability to independently modify interest rates. However Canada has a huge number of imports from the US and a relatively limited ability to diverge in any big way from US interest rates since higher prices directly effect Canadian consumers. In addition our economies tend to move together due to trade so interest rates tend to move together too.

 

You can look at he following graph to see how closely US and Canadian interest rates follow each other.

https://fred.stlouisfed.org/graph/?g=7NUe

There is about a 91% correlation between Canadian and US interest rates. In the whole data series there are only really two periods of divergence: in the 1970's and around 1990. Both occurring when US/Canada were far less economically integrated than they are today.

 

The downsides of a floating exchange rate: uncertainty about investments, trade uncertainty vastly out-ways the very limited monetary independence that Canada has.

 

There is probably more trade, economic interaction and even human movement north south across the border than East-West in Canada. It makes a lot more sense for Alberta to have a separate currency from the rest of Canada than it does for Canada to have a separate currency from the US.

 

[bizaro86]

As an Albertan, I actually wouldn't be opposed to us having a separate currency from the rest of Canada. Since the oil shock our terms of trade have declined precipitously, and that has affected the value of the CAD, as Albertan exports are material to the whole country.

 

If we were in a currency union with the US, the safe haven USD strength would have removed the currency related safety valve that has reduced the pain in Alberta, to the point that we would be in big trouble here. It would lead to political unrest in the first oil bust after the currency union, for sure.

[Cardboard]

"There is probably more trade, economic interaction and even human movement north south across the border than East-West in Canada. It makes a lot more sense for Alberta to have a separate currency from the rest of Canada than it does for Canada to have a separate currency from the US. "

 

I agree and disagree and the disagreement is more important IMO.

 

Cultural, political and economical association counts. Alberta did not separate from Canada because the CAD$ did not drop as much as the oil price. There was some pain and it was "accepted". The same is true when oil is high and the CAD$ and it hurts exporters. At that time, it is Alberta and resources provinces that generate a surplus and support Quebec and others.

 

That is what they failed to understand in Europe. People will support their brothers and sisters but, when it comes to distant relatives, the cord is cut pretty quickly.

 

Cardboard

[rb]

Always love it when people talk about currency unions when they haven't the slightest clue about optimal currency areas.

 

I feel like instead of making this remark it would have been better if you just explained what an optimal currency union is, what evidence there is that an optimal currency area is in fact really optimal for a currency union and then finally why Canada/US is not an optimal currency area.

 

As for my argument for why US/Canada should form a currency union, its based on a simple fact: the biggest advantage of an independent currency for Canada is the ability to independently modify interest rates. However Canada has a huge number of imports from the US and a relatively limited ability to diverge in any big way from US interest rates since higher prices directly effect Canadian consumers. In addition our economies tend to move together due to trade so interest rates tend to move together too.

 

You can look at he following graph to see how closely US and Canadian interest rates follow each other.

https://fred.stlouisfed.org/graph/?g=7NUe

There is about a 91% correlation between Canadian and US interest rates. In the whole data series there are only really two periods of divergence: in the 1970's and around 1990. Both occurring when US/Canada were far less economically integrated than they are today.

 

The downsides of a floating exchange rate: uncertainty about investments, trade uncertainty vastly out-ways the very limited monetary independence that Canada has.

 

There is probably more trade, economic interaction and even human movement north south across the border than East-West in Canada. It makes a lot more sense for Alberta to have a separate currency from the rest of Canada than it does for Canada to have a separate currency from the US.

Sorry if my initial remark was snarky but your premise is seriously flawed.

 

Firstly yes, fixed exchange rates help with trade and investment. This is actually because it eliminates frictional costs such as FX conversion and FX hedging. However many studies over many periods have shown that the benefits are fairly small for large economies with advanced capital markets. So the benefits of belonging to a currency union are smaller for Canada and the US then say for Austria and Greece, and even in that case they proved to be pretty small.

 

Secondly, the main benefit of having floating exchange rates is not an independent monetary policy. It is an ability to respond to asymmetric shocks by quickly adjusting relative prices and wages.

 

Thirdly, Canada doesn't have limited monetary policy. It has fully independent monetary policy. Also the exchange rate does a lot of adjustment work so that monetary policy doesn't have to do it. When you say that there is a high correlation between US and Canadian rates what you are talking is rate trends. But if you look at the chart the rates are rarely the same. Which means that US rates would have rarely been correct for Canada. Probably even more so if you take away floating rates. At that point the only adjustment left is inflation/deflation which is a very bad adjustment mechanism. If you were to equate the interest rates in that chart you'd have Canada getting whipped in boom bust mode with big economic costs not to mention human suffering.

 

Optimal Currency Area theory is basically of the view that currency areas tend to be suboptimal and is concerned with mitigating the downsides. So for a currency area you should have:

 

1. Economies of similar size and makeup. This is to minimize asymmetric shocks. Fail US is 10 times the size of Canada and Canada has a large resource sector that is prone to asymmetric shocks.

2. High labor mobility. Yea right! Americans love that open border talk.

3. Price and wage flexibility. This doesn't exist period.

4. Integrated deposit insurance and banking regulation. - That would have worked great in 2008.

5. Integrated fiscal policy. The last thing Canadians need is the US House of Representatives involved in their fiscal policy and I would love to the headlines in the US when the American taxpayer has to pay for Canadian "socialized" health care.

 

OCA is basically of the view that to have a functioning currency are you need to have all 5 or you'll have problems. As you can see with Canada and the US you can barely maybe have 1 out the 5 which means big problems.

[rb]

"There is probably more trade, economic interaction and even human movement north south across the border than East-West in Canada. It makes a lot more sense for Alberta to have a separate currency from the rest of Canada than it does for Canada to have a separate currency from the US. "

 

I agree and disagree and the disagreement is more important IMO.

 

Cultural, political and economical association counts. Alberta did not separate from Canada because the CAD$ did not drop as much as the oil price. There was some pain and it was "accepted". The same is true when oil is high and the CAD$ and it hurts exporters. At that time, it is Alberta and resources provinces that generate a surplus and support Quebec and others.

 

That is what they failed to understand in Europe. People will support their brothers and sisters but, when it comes to distant relatives, the cord is cut pretty quickly.

 

Cardboard

I agree with most of what you guys are saying. Canada is not really an optimal currency area and resources are a big part of that. It's also true that things would work better if Alberta would have it's own currency. However I think that a more optimal solution would be for Ontario to have a separate currency.

[scorpioncapital]

I wonder what happens when not only every country wants its own currency but every state. How about every city? Every company? :)

 

[rb]

I wonder what happens when not only every country wants its own currency but every state. How about every city? Every company? :)

Of course there is a point where things are getting ridiculous and the costs start to overcome the benefits. I imagine that the Saskatoon/Albuquerque currency cross won't be very liquid.