It’s the wrong time of year for the elusive loon to be flying north. But the one on the dollar coin is doing just that, as concerned exporters and economy-watchers look on. Unlike its mid-summer ascent, the current move to US 92¢ seems to be sticking. If so, exporters are in for a rough ride.
Exporters calmed down in early July when the loonie retreated to the mid-80¢ level after a 29-day, 12¢ surge to just over 92¢. There wasn’t a lot of recovery talk at the time, and the surge was the exporters’ worst nightmare. Unfortunately, the retreat proved temporary. Mid-July saw the loonie rebound to US 90¢, then climb steadily to US 93¢ by early August. Since then it has twice come under downward pressure, only to rebound to the US 92-93¢ range – well above our 85¢ forecast.
Speculation isn’t the principal cause. The Canadian dollar’s movements reflect the path of its key drivers. Half of the recent run is due to oil’s rise to the US $70-75 per barrel range. Other commodity prices, particularly base metals, have added another cent. The balance is accounted for by Canada’s relatively tighter monetary policy and the speculative drubbing that the greenback is being subjected to on world markets as pundits mull over the true affordability of US stimulus measures.
So, are current levels here to stay? Possibly, if the world economy is truly recovering. At current levels, basic commodities have priced in a recovery. And with hopes of recovery rising, the panic-induced rush into safe US-dollar instruments is receding. But current growth seems more related to the global deluge of monetary and fiscal stimulus, and less to a return of fundamental demand. As such, the drivers of the loonie’s ascent are on shaky ground, and vulnerable to the twitches of a policy-propped economic environment whose consistency and durability remains in question.
Current demand for Canadian exports suggests that global recovery has yet to kick in. Commodity prices may be getting some lift, but prices for other exports are showing little movement. Under these circumstances, a surge in the Canadian dollar is the last thing exporters need. Given the impact of the dollar on both exports and imports, and taking into account the share of trade, and particularly US trade, in Canada’s GDP, if the loonie remained stuck at current levels, all things being equal the delayed impact on the economy would be considerable. Our estimates suggest a 2-3% hit to GDP in 2010. Given that 2% growth is all that most forecasters expect Canada to see in 2010, under the present currency situation, Canada could be facing pretty slim prospects next year.
Unfortunately, it could get worse. Although limited to a few forecasters, the expectation that the Canadian dollar could again see parity with the greenback by year-end is growing. It is highly unlikely that parity or anything close to it could be sustained without a fulsome global recovery. Recovery would bring with it a resurgence of international demand for Canadian goods and services, and a rise in prices paid, which in turn would partly shield exporters from the full impact of a currency shock. Even so, the higher loonie would pose a greater threat to Canada’s participation in the recovery.
The bottom line? If sustained, the current level of the Canadian dollar will punish exporters in the lead-up to true global recovery. A move to parity would only worsen the situation. But continued worry about the path of the recovery is expected to keep the loonie in the mid-80¢ range in the near term.