Let me now relate all this more closely to our recent experience in Canada, and explain how monetary policy can be expected to respond to these different types of currency movements. Consider the sharp appreciation of the Canadian dollar since 2003. This movement has largely reflected strong world demand and prices for our energy and non-energy commodities.
Before racing to solution, however, it is important to understand what forces are driving these prices. Available evidence suggests that most of the major swings, as well as a large proportion of the short-run volatility that we observe, can be explained by market fundamentals.