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Pastimes : C$ - The Peso of the North? -- Ignore unavailable to you. Want to Upgrade?

To: Kitskid who wrote (165)	12/7/2000 12:30:23 AM
From: Kitskid	Read Replies (2) \| Respond to of 177

==============================<SNIP>---------- hsbc.ca by David E. Bond, Senior Consulting Economist to HSBC Bank Canada, the Economic Bulletin is a weekly commentary on current economic issues. The poor Loonie has been suffering of late. Not that long ago economists, myself included, were predicting that it would be worth at least 70 cents U.S. perhaps by the end of this year but certainly by next. But instead of rising it has been falling, slowly but surely. One economist has predicted it will go to 60 cents. At that level, a vacation in the south far from the long winter snows, recedes well beyond the limits of a great number of family budgets. Well, the Loonie may look like a basket case, but it really isn't. True, compared to the U.S. dollar, our currency looks particularly weak, but have you checked it out recently against the Australian dollar, or the French franc or the British pound or the Deutsche Mark? Against those currencies, in fact against virtually every other currency save the U.S. dollar, the Loonie has appreciated not depreciated. Investors from around the world have been pouring their savings into U.S. dollar assets because they see it as the world's safest currency. Since we sell the lion's share of our goods and services to the U.S., our dollar should be strengthening along with theirs. At the same time, however, we export some products (mainly resources) into the global market. If our dollar appreciated to the same degree as the U.S. dollar, we could soon be priced out of many of those global markets. So it is reasonable to expect that the Canadian dollar will appreciate relative to other currencies except that of the U.S. dollar. The very same thing happened in 1997 during the Asian meltdown. A second factor weakening the Loonie is our lower interest rates compared to the U.S. This reflects two factors: our superior performance in price stability and our central bank implementing a less restrictive monetary policy. The fact that an expansionary fiscal policy, particularly in the form of promised tax relief, has not yet been offset by a tightening of monetary policy may cause further worries about potential inflation. In the eyes of foreign investors, the yield on Canadian dollar assets is not sufficient to offset the risk of a possible future decline in its value and therefore the Loonie is lagging behind the U.S. greenback. Also we have been rather cavalier in paying down our national debt which may have scared off some potential investors. They may believe this failure demonstrates the unwillingness of Canadians to act in a responsible fashion. After all, if you don't pay the debt down in a period of rapid expansion when do you do so? How far can the Loonie fall? Obviously the lower limit is zero but that is very unlikely. 60 cents may well be the nadir. The U.S. economy is slowing down which, after more than 10 years of uninterrupted expansion, is not that surprising. Japan in unlikely to exhibit any really substantial growth for some time. But Europe now picks up the pace that will do two things: it will help reduce the sizable deficit in the U.S. balance of payments; and it should also start to deflate the dollar relative to other currencies. Of course, the decline in the Loonie cannot be entirely explained by external forces. We have done some short sighted things that have hindered our economy's ability to adjust. We have long tried to forestall adjustment in certain regions of the country even in the face of relentless economic pressure. There were, and still are, a multitude of government programs from the defunct Department of Regional Economic Expansion to the current Atlantic Opportunities Fund all aimed at hindering, rather than facilitating, adjustment. We have also managed to make our domestic market less than efficient. We have barriers hindering inter-provincial commerce in both goods and services. An accredited worker in one province may not be able to transfer his or her skills to another without going through a new set of qualifying exams. And we have been singularly unsuccessful in reversing the growth of our pool of unskilled workers. If we hope to restore our Loonie and our standard of living to 1989 levels we will need courage and the willingness to take on a host of sacred cows. If the election campaign just past is any indication, the cows are still safe, and the weakened Loonie will continue to be a graphic example of how we are doing on a daily basis. We can and should do better. Economic Bulletin Économique, prepared by David E. Bond, Senior Consulting Economist, HSBC Bank Canada, reflects his personal observations and does not necessarily reflect the position of HSBC Bank Canada or its board of directors. The Economic Bulletin conomique is not intended to be a comprehensive review of all developments nor is it intended to provide financial advice. Readers should not act on information in Economic Bulletin Économique without seeking specific advice from qualified advisors on particular matters which are of concern to them. -------------------------------- This publication may be reproduced in whole or in part as long as credit is acknowledged to the author and HSBC Bank Canada.