The 'new normal' for the Canadian dollar
Jeremy Torobin, The Globe and Mail
April 05, 2010
All signs point to the loonie hovering near, or above, parity with the greenback for months, or even years.
But there's considerable debate about how well manufacturers will be able to live with that "new normal."
Many companies are adapting, either through a process known as hedging, or by pursuing new markets outside the United States and taking advantage of the higher currency to buy new equipment abroad.
And while Bank of Canada Governor Mark Carney said recently that executives need to do more to make their firms more productive and nimble, neither he nor Finance Minister Jim Flaherty has expressed much concern in the past few weeks about companies' ability to work around the soaring currency.
That calm acceptance from Canadian officials has been bolstered by a string of stronger-than-anticipated economic reports, capped off last Wednesday by January gross domestic product data, which showed the manufacturing industry - heavily dependent on exports to the wounded U.S. market where the loonie is making Canadian goods more expensive - expanded by nearly 2 percent during the month.
That was the first time since the recession that the sector posted a substantial gain.
Still, Bank of Montreal economist Douglas Porter noted Friday that although manufacturing is playing a big role in the recovery, "real factory activity is still down almost 18 percent from the cyclical peak of four years ago, and may never fully get back to those levels." Canadian Imperial Bank of Commerce's Avery Shenfeld was more direct a couple of weeks ago, saying it's too soon to conclude from a few pieces of data that factories have managed to make themselves resilient enough to withstand the high loonie.
"Adjusted for inflation, manufacturing and GDP shipments are sitting at only 1997-98 levels, and nearly 20-percent below the pre-recession peak," Shenfeld said on March 22. "The effect of the strong Canadian dollar will show up in the extent to which the factory sector can make up that vast remaining ground."
Nonetheless, it's hard to find a reason that the currency would drop more than a cent or two any time soon. Rising oil prices and a greater appetite for risk are pushing investors away from currencies like the U.S. dollar and toward those linked to commodity prices and strong economic growth. That's on top of longer-term factors, such as central banks around the world buying Canadian dollars to diversify their currency reserves amid questions about the greenback and the euro and, more immediately, mounting signs that the Bank of Canada will start raising interest rates in June or July, well before the U.S. Federal Reserve Board.
For the best clues in a while about how companies are faring in this climate, look to a jobs report this Friday from Statistics Canada and the Bank of Canada's quarterly business outlook survey on April 12.
Both will go a long way toward showing not only how confident companies are that they can still thrive, but also how much 'slack' there really still is in what, even with a 99-cent loonie, increasingly seems to be the world's most well-rounded advanced economy.
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