Econowatch: Signs point to the Canadian dollar taking a nose dive
Canadian currency, close-up of five, ten and twenty dollar bills
A while back, Alexei Ulyukayev, a top official at Russia’s central bank, gave Canadians yet another reason to feel smug about their place in the global economy. It was early 2010 and Ulyukayev made it known the bank planned to buy up Canadian dollars to diversify its foreign exchange reserves away from the U.S. dollar. It was perceived as a shot across the bow of American pride, and yet another endorsement of Canada’s apparent economic exceptionalism, made evident by our robust job market, housing sector, stable banks and sound government finances.
By last week, when Goldman Sachs issued its recommendation for investors to “short the loonie”—or bet on it falling in value—much of that narrative had begun to uncoil. Weakening prices for commodities have kneecapped Canada exports. Meanwhile, employment is stalled, thanks to a manufacturing sector that has barely recovered from the recession. Credit rating agencies fret that the teetering housing market and staggering consumer debt levels will hammer the banks. And even if Ottawa balances its books by 2015—an epic “if”—provincial debt levels are exploding.
Against all this, foreign investors have cooled to Canada. Absent their money flowing across our borders, the gaping hole in Canada’s balance of trade with the world has been exposed. The current account deficit is equivalent to 3.3 per cent of GDP. A gap that wide “continues to suggest the Canadian dollar is overvalued,” wrote Robert Kavcic, an economist at BMO Capital Markets. Yes, the economy grew 2.7 per cent last quarter (that’s considered impressive nowadays), but Canada still lags the U.S. in growth. What made Canada attractive before was that everyone else looked so awful. That’s no longer the case.
How low will the loonie go? It’s currently US94 cents and, among Canadian economists, the floor is seen at US90 cents. Goldman’s research team, on the other hand, figures the loonie will crash right through that, to US88 cents. It’s already been 10 months since the loonie last touched parity with the greenback, and 2½ years since it peaked at US$1.06. It’s probably time we get used to the idea it might not claw its way back there for a long time to come.
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