As tongue-lashings go, it was rather sedate. When the Bank of Canada left its overnight interest rate at 0.25 per cent on Tuesday, it took the opportunity to send a message to currency markets. If the loonie continues to approach parity with the American greenback, it will “more than fully offset” the recent signs of recovery.
Those would hardly be fighting words—normally. Except this isn’t the normal world. It’s the rarefied realm of central banking, where economists hang on every intonation for hints of future policy changes. In that context, the warning came like a blow to the solar plexus. It worked, too, for now. After climbing nearly 18 per cent this year, the Canadian dollar fell two cents immediately following the central bank’s statement, to US95.3 cents.
Whether it will stay down is another matter. Some smart investors don’t think so. Last week Dennis Gartman, editor of the influential Gartman Letter, was in Toronto and told a gathering of financial analysts that “the [loonie] will move way past parity.” This from a man who, 20 years ago this month, laid out his “ridiculously simple rules” for trading, with number two being “buy high and sell higher.” So how much higher could the Canadian dollar go? At least another 14 per cent more than it has already, he said.
There’s a lot of evidence to suggest he’ll be proven right. For one thing, commodity prices are far below where they were in September 2007, when the dollar last hit parity. But as the economy recovers, they’ll rise. As they do, it will add even more strength to the loonie. Hence the Bank of Canada’s fears that the dollar will crush Canadian companies that rely on exports for their survival.
But another thing has changed, and it offers hope that companies are coming to terms with the strengthened dollar. Earlier this month, the Bank of Canada released its autumn business outlook survey. When businesses were asked if sales are expected to grow over the next year, they were the most optimistic they’ve been in a decade. Nearly 70 per cent said yes. In 2007, with the dollar soaring, the mood was far grimmer. Fewer than half that many saw any upside, and most expected their businesses to flatline or decline.
Does that mean Canadian companies have made the painful adjustment to life with a strong loonie? Not entirely. But they’ve started the process. More importantly, the shock from the initial body blow of a high dollar seems to be wearing off.
GRAPH OF THE WEEK: A bear market rally
It’s no surprise investors are cheering recent market gains. This is the sharpest rally ever seen in the midst of a recession. But some observers wonder if it’s too good to be true, given the still-fragile state of the economy. Is this another bubble?
THE GOOD NEWS
Housing on fire
What was that about a housing correction? In the third quarter, Canadian house prices jumped 11 per cent over the same time last year, as buyers snapped up 135,182 existing homes. In September alone, the number of sales jumped 17 per cent from a year ago, to 42,958, according to the Canadian Real Estate Association.
The Canadian economy is forecast to grow 2.9 per cent next year, and as much as 3.6 per cent in 2011, the Conference Board of Canada predicts. There is one catch. The gains are largely the result of massive government stimulus programs.
The U.S. Labor Department offered some rare but welcome news on the employment front. The number of newly laid-off workers filing for unemployment insurance has fallen to the lowest level since January. First-time claims fell to a seasonally adjusted 514,000, below what economists had expected.
Commercial real estate is making a comeback in Toronto after nearly two years of disappointing sales. Investment in properties in Canada’s largest city jumped 46 per cent in the third quarter compared to the previous quarter.
THE BAD NEWS
Driving down sales
We knew it was coming but that doesn’t make it any easier. With America’s cash for clunkers program finished, the hangover is setting in. In September, automobile sales plunged 10.4 per cent. That in turn dragged U.S. retail sales down 1.5 per cent, the worst decline since retail sales fell 3.2 per cent last December. We’re feeling the effect in Canada, too. Factory sales dropped 2.1 per cent in August, due largely to declining automobile shipments.
Out of house
Someone forgot to tell the banks things are improving in the U.S. housing market. A record number of homeowners were forced into foreclosure in the third quarter. More than 930,000 homes received a default notice or were repossessed, a jump of 23 per cent from the year before, according to research firm RealtyTrac. One out of every 136 U.S. homes received a foreclosure filing during the quarter.
Major U.S. credit card companies reported a larger than expected increase in late payments in September. The data suggests Americans are still struggling with job losses and that the number of bad loans may increase in the coming months. Bank of America wrote off 14.5 per cent of its card loans, the highest rate among credit card issuers.
SIGNS OF THE TIMES
- Hoteliers in Hawaii are facing a double whammy as occupancy rates slump to a 15-year low just as the number of new or renovated rooms is on the rise. Investors sank boatloads of cash into Hawaiian resorts during the last real estate boom, but hotels are no longer generating enough cash to pay for the loans. The numbers of visitors to the state has fallen over 10 per cent in the past two years. It’s all left the hotel industry teetering on the brink.
- The 427-year-old Tour d’Argent restaurant in Paris is cleaning out its 450,000-bottle wine cellar, considered one of the best in the world, and is putting 18,000 bottles up for auction. Among the treasures: a 1788 cognac that’s expected to go for as much as US$4,500. The sale is expected to raise US$1.5 million as demand for rare and pricey bottles comes roaring back after falling off dramatically last year.
Canada’s economic recovery is under threat by the soaring loonie, which continues to hover around US95 cents. Driven in part by the weak U.S. greenback, the surging Canadian dollar is putting exporters at a competitive disadvantage just as demand for their products sputters back to life.
“The latest surge is indeed likely to put a heavy dampener on Canada’s fledgling economic recovery.”—Douglas Porter, deputy chief economist, BMO Capital Markets
“The message to manufacturers in Ontario is they’re going to have to position themselves to live with this.”—Avery Shenfeld, chief economist, CIBC World Markets
“The last thing the Bank of Canada is going to want is a stronger Canadian dollar.”—Craig Alexander, deputy chief economist, TD Bank
“The Canadian dollar will trend well past par to the U.S. dollar. It has no choice… because of the inherent strength of the Canadian economy.”—Dennis Gartman, economist and editor, the Gartman Letter
“An orderly decline in the U.S. dollar is necessary to a sustained rebalancing of the global economy.”—Sherry Cooper, chief economist, BMO Capital Markets
“There is now an increased focus on parity. We can get there very quickly.”—Camilla Sutton, currency strategist, Scotia Capital