The angst over the loonie's decline -

The angst over the loonie’s decline

What now? What next? Jason Kirby explains

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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.