The angst over the loonie’s decline

What now? What next? Jason Kirby explains

MAC06_KIRBY_COLUMN01 750x422

Andrew Tolson

Nothing sets off the passions of Canadians like a falling loonie. Unless it’s a rising one. We fret no matter which way the dollar heads. When low, we rage that it jacks up prices for consumers. When high, we fear it will hammer exporters and lead to job losses. So yes, Canadians take the value of the buck seriously. Doug Porter, the chief economist at BMO Capital Markets, was only partly joking the other day when he posed a multiple-choice quiz: of Rob Ford, Justin Bieber and the loonie, which is “the greatest source of infamy, shame and/or humiliation for Canada?” Correct answer: the bird.

No question, it’s been a rough ride for the dollar. As of Jan. 28 it was down 10 cents from a year ago, and 16 cents from its high in 2011—which, incidentally, was when a group of economists and business leaders in Iceland proposed adopting it as a national currency. (Is there an Icelandic word for “close call?”)

But amid the usual hand-wringing, there’s been an added level of angst. In the eyes of some, the loonie is being deliberately, and inappropriately, devalued by Bank of Canada governor Stephen Poloz, Finance Minister Jim Flaherty and his boss, the Prime Minister. Former Tory MP Dean Del Mastro accused the trio of “attacking” the dollar in a bid to help the manufacturing sector. In some cases the speculation has veered into tinfoil-hat territory, with currency traders and one former Maclean’s columnist suggesting Poloz was a plant, handpicked by Flaherty to drive down the dollar. The evidence of this conspiracy? Poloz, formerly of Export Development Canada, hadn’t worked in monetary policy for years, deputy governor Tiff Macklem had been the odds-on favourite for the top job, and Flaherty had stuck his nose deep into the selection process. Never mind that Poloz’s predecessor, Mark Carney, had spent barely a year at the bank in his entire career, was also picked over Macklem and other perceived shoo-ins, and was one of Flaherty’s top advisers at Finance when he got the nod.

So how has Poloz carried out this assault? In October, citing a deteriorating economy, the bank dropped from its regular statements a reference to tightening monetary policy—raising rates, in other words. Rates haven’t actually budged, mind you. Poloz is in the same bind Carney was. Raise them and the dollar could surge. Cut them, and household borrowing could explode. Which leaves jawboning the dollar lower the only real tool at his disposal. And, you know, everybody in Canada totally listened to the last guy and his incessant chirping about rising household debt levels. Besides, given Carney’s repeated warnings about the danger of a strong loonie to the recovery in the last few months of his mandate, it’s just as likely he’d have dropped the bank’s tightening bias himself.

The biggest flaw with the battered-dollar theory is that there are far simpler ways to explain its decline. The loonie, like any free-floating currency, is a contestant in a popularity contest, one with millions and millions of judges constantly scrutinizing every new shred of economic data to ascribe it a value relative to all the other currencies. Frankly, Canada doesn’t look appealing. The commodity supercycle, which sent resource prices soaring for a decade and served as an engine for Canada’s economic miracle, has ended. The U.S. economy is improving and the outlook for Canada has deteriorated. The job market is stagnant, while the current account deficit, a measure of how much more we buy from the world than we sell, is equivalent to 3.3 per cent of GDP, the highest level in two decades. Pile on a new-found international awareness of how shaky our housing market is, and really, it’s a wonder the loonie isn’t already at US70 cents.

The more important question is, did we do enough to capitalize on the strong dollar while it was here? One of the benefits of a strong currency, even for struggling export businesses, is that it makes it cheaper for them to buy foreign-made machinery and equipment and strengthen their operations for better times ahead. The good news, on this front, is that Canadian companies gradually closed the gap with the U.S. over the past five years, according to a November report from the C.D. Howe Institute, which cited the level of capital investment per worker in each country. At the same time there’s evidence Canadian companies used the strong dollar to invest abroad. In 2012, businesses invested $711 billion outside the country, up 63 per cent from 2002. Arguably it should have been more, but any deals companies do now will cost them more.

None of this means the bank isn’t happy with the loonie’s swoon. Manufacturers might have an easier time hawking widgets. But a lower dollar is also expected to boost inflation, which has languished below the bank’s target of two per cent. That would have the effect of holding down real, or inflation-adjusted, wages and make Canada more competitive. It might also give the bank a reason to raise rates, and give itself more wiggle room to cut them should it need to, later on.

For everyone else, it’s useful to remember the value of the loonie—either high or low—is something to be taken advantage of, not something to be ashamed about.


The angst over the loonie’s decline

  1. And devaluing, depreciating, ever taxing Canada want job creating investment? What you smok’in?

    Fact is lay offs are happening, people with less money (taxes) and less value money (currency fraud for debt bloat) means we have less value to spend on other peoples jobs.

    You think a 10 cent drop, for 11% higher prices to me, higher material, machinery, input costs mean I am going to spend more on goods and services is some stupid thinking. Because the reality of money devaluation is you have less value to spend on other peoples jobs.

    Currency devaluation is a economic failure in motion.

    Enjoy as I spend less on other peoples jobs, taxes, inflation, devaluation assures we will be spending more to get less and employ fewer people. As this does mean we all get less value for our money, and will get less goods and services.

    But we have corrupt statism big government bloat.

    • Canadian Big Government is tied to Obeisity Rates

  2. Here is an example or REAL events and not government/bank propaganda.

    Heinz plan spends probably 75% of its costs are in sugar, tomatoes, salt, containers and machinery. All these costs go up 11% for a 10 cent drop off par. To come up with $1 USD with a 90 cent loonie takes 11% more cents CAD. (1.00 / 0.90 ). Unable to pass on this huge 11% price increases, the plant closes.

    Same thing with Bombardier. CAD priced contracts but the majority of the planes costs just went up 11% or more. Aircraft engines, tires, seats, aluminum/alloys, composites, plastics, electronics, machinery all just went up 11%… 1700 lose jobs as Bombardier tries to get out of money losing contracts for its economic survival.

    Not yet reflected but should hit home builders soon as raw materials for building a home are 11% higher. Why would a BC producer of wood or US toilet maker sell product to a 90 cent loonie when they can get $1 USD of more value?

    Fact is these price pressures are immediate, next fridges and parts from Korea will be 11% more, next autos will be 11 more even f they are made here or US….

    So people with less value money will get less goods and services. And less goods and services means less jobs as GDP doesn’t drive jobs, economical and affordable exchange of goods and services drive jobs. GDP is a bogus indicator or jobs and economic health as it has no account of the amount of goods and services created, just the devalued money used.

    But our corrupt government just did a Cyprus like tax grab but it appears to us as devalued money as unlike Cyprus wealth grab, Ottawa can print money and devalue you with hyper inflation. As inflation like this is a cumulative hyper-tax on the people.

    Yep, we are a negative value tax inflated economy of debt. And are destined for economic failure unless someone shakes up Ottawa and provincial debt mongers good.

    Best to invest in gold our outside of Canada, our futures are corrupt government, devalued money and debt-tax slavery.

    And pensions too, all have 11% less value, its why they want more to pay less.

  3. My offshore investments in terms of CAD went up 11%, but I know they are good dollar gains, in terms of value there was no gain as I now have to pay 11% more for stuff. A fridge I needed to replace a filing one was $1999 in December, now $2199 to reflect the less value currency.

    Its an inflation tax. Now image pensions, poor, poverty, disabled, other fixed incomers all get 11% more poverty as they get less value money. This tax actually hurts middle class and lower class more than rich as rich move money offshore to negate some of the value losses of devalued money.

    But I am sure CRA will add further dmanges as devlaued money means false gains will be taxed.

    This is a Ottawa/provincial greed move, devalue money as a cumulative hyper-inflation tax. Everyone suffers except for debt greedy boated governments.

    Governments can’t solve the economic problems as it is their excessive non-value added consumption causing the economic problems.

    Gets even worse if you use the worlds largest currency the Yuan, as USD fell to the Yuan, CAD fell even faster than USD to the Yuan.

    But hey, we have “blind faith” in statism.

    • Nobody I know is saying the US has forgotten how to PRINT MORE MONEY !

  4. The dollar is going down because Canada is now running a current account deficit, and because the FED is slowing the pace it is conjuring money out of nothing (QE), so there are fewer American dollars going abroad looking for yield. It is not just the loonie. It is Australia and almost every emerging market.

    A big FU from Bernanke/Yellen and Obama/Congress. Smaller developed countries central banks and emerging market central banks are basically impotent against abuse of the privilige of having the world’s reserve currency by the United States.

    All that discounted landlocked Alberta oil and natural gas will not allow for Central Canadian overconsumption any longer. Toronto even prefers paying world price for oil (by refusing to reverse line 9) rather than the discounted Alberta stuff that Chicago and the midwest get.

    Welcome to Tom Mulcair’s wet dream.

    Most new manufacturing is now robotic and/or automated with fewer but higher paid jobs associated with them. I.e. Manufacturing has become like the extractive industries, more capital intensive than labour intensive.

    So a higher currency is better. Because companies need to buy the robots and the automated equipment for the fewer though highly paid workers to operate.

    The high dollar also means we can afford those $5 lattes and fine trendy dining in Toronto for all those barista and entertainment/dining jobs for university arts graduates.

    But the dollar will only go up if Canada runs a current account surplus and thus that means the pipelines have to be build so central Canada’s consumption economy can survive.

    • My Chile, Mexican, Australian, Asian and to a lesser extent US investments have been doing much much better.

      CPP says it earned 10%, but reality is they devalued money to make foreign investments create a dollar gain without value, as money is worth 11% today compared to 6 months ago. Its just deception and propaganda.

      Yep, CPP earned 10% more in dollars but lost 11% in value for another year of depreciating money negative value. I cal it the race for the bottom mentally as people with less value money, less value in incomes will be spending less on other peoples jobs and more on life essentials.

  5. This is flaherty soloution to cross border shopping
    Don’t think so Jimbo……….lotta stuff still way cheaper, but nice try anyway

  6. under martin the dollar was on its way to 50c

  7. this is not surprising. oil our number one export is not in demand. We need to become more broad in our resources tying ourselves to the oil economy is a way to become way to exposed to any downturns. its a fact oil is on a downswing. countries are finding that any way to get away from oil is a way to save money. We can keep going on the whole oil thing and end up like saudi arabia. A whole lot of sand but not much else. We fortunately have huge resources in things that matter. We have huge resources of hydro electric power. We have natural gas as well and windmill technology not to mention good technology. We need to be more self sufficient this idea that we can export our way out of trouble is a fantasy. The world economy and trading has done little to advance our economy in fact it has sent us backwards. now those previous backwards countries are the ones benefitting from our needs. We were sold a bill of goods economies can not rely on trading to make anything but putting a huge whole in trading account deficits. As long as their are smaller developing markets like vietnam, thailand south and central america we will not be able to compete. Frankly we dont want to compete with dollar a day wages. We have all the tools, technology and resources within the country to handle what we need competing with the US, China and the EU is a fruitless waste of time. So the currency is low the only reason that hurts is if you are buying from outside the country. This will stop the flow of people south of the border as well as adding to our manufacturing sector. Like what was said above take advantage of the things you can while its available. If you are crying because you cant go to the states now for cheap dairy and gas then thats too bad maybe you should have supported our markets in the first place and we wouldnt be stuck with a 90 cent or less dollar.