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Peter Hall


Does the Loonie Trump the Greenback Yet?

Posted: 11/23/2012 5:10 pm

Mention exchange rates and most Canadians will immediately assume U.S. dollars. With most of our trade still denominated in USD, the fixation is natural. Movements in the CAD/USD rate directly affect export revenues, cost structure, profit margins and competitiveness. Appreciation from a USD 0.63 in 2002 to 1.09 in 2007 was a massive challenge for exporters. One response to this development has been a shift toward non-traditional markets, and this is changing the exchange-rate conversation.

Even so, the USD still dominates, and keeping a handle on CAD/USD fluctuations is essential. EDC Economics closely watches four key currency drivers. First off, commodity prices. Soaring oil and base metal prices explain a large chunk of the loonie's recent appreciation; however, they don't tell the full story. Short-term interest rate differentials are important. And then there's the "halo effect." Sound fiscal management, a healthy banking sector, robust domestic growth and our strong resource base have together attracted a lot of foreign interest -- over CAD 100 billion in portfolio investment in the past three years alone -- keeping the loonie on the high side.


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  • Bank of Montreal Dollar - 1825

    Until the mid-19th century, Canada's future provinces used the "Canadian pound." Bit by bit, various jurisdictions began to switch to a metric system, and with it came the concept of the Canadian dollar. This Bank of Montreal-issued dollar bill is among the first bills called a dollar to have been printed.

  • Bank of Montreal Dollar - 1859

    Various banks printed their own currency until eventually the Bank of Montreal was charged with being the official issuer of the Canadian dollar, a practice that stayed in place until the Bank of Canada was created in the 1930s.

  • Bank of Toronto Dollar - 1859

    The Bank of Toronto (today known as TD Bank) was among many banks that issued Canadian dollars in the second half of the 19th century.

  • Ontario Bank Dollar - 1861

    Image courtesy of the Bank of Canada.

  • Province of Canada Dollar - 1866

    The province of Canada comprised Ontario and Quebec and existed from 1841 to 1867. It issued its own currency. Image courtesy of Bank of Canada.

  • Dominion of Canada Dollar - 1870

    With confederation in 1867, the first truly national Canadian dollar came into being. Image courtesy of the Bank of Canada.

  • Dominion of Canada Dollar - 1898

    Image courtesy of the Bank of Canada.

  • Dominion of Canada Dollar - 1911

    Image courtesy of the Bank of Canada.

  • Dominion of Canada Dollar - 1917

    Image courtesy of the Bank of Canada.

  • Dominion of Canada Dollar - 1923

    Image courtesy of the Bank of Canada.

  • Bank of Canada Dollar - 1935

    The Bank of Canada took over the issuance of currency from the Bank of Montreal when it was created in the 1930s. Image courtesy of the Bank of Canada.

  • Bank of Canada Dollar - 1937

    Image courtesy of the Bank of Canada.

  • Canada Dollar - 1954

    The 1954 dollar was the first to feature Queen Elizabeth II and the first to simply say "Canada" on it, rather than featuring the name of a bank, province or referring to the country as a "dominion."

  • Centennial Dollar - 1967

    Image courtesy of the Bank of Canada.

  • Canada Dollar - 1973

    This was the last paper dollar issued in Canada. It was in circulation until 1987, when the loonie replaced it. Image courtesy of the Bank of Canada.

  • The Loonie - 1987

    The loonie replaced the one-dollar bill in Canada in 1987. Image: CP

  • Canada 125 Loonie - 1992

    The Mint issued a special edition of the loonie in 1992 to commemorate the country's 125th birthday.

  • Vancouver Olympics Loonie - 2010

    An Inuit inukshuk graced the tail of this loonie issued in 2010 to coincide with the 2010 Winter Games in Vancouver.

  • The Loonie - Anniversary Special - 2012

    The Royal Canadian Mint issued a special-edition version of the loonie in 2012 to commemorate the coin's 25th anniversary. Image: Royal Canadian Mint.

How about movements in the U.S. dollar itself? Recent conditions have left the world with fewer reserve currency options. For the moment, the euro is on the back burner. Although popular as a carry-trade play, the yen faces significant structural concerns. As such, the USD has actually gained strength as the only true safe-haven currency option. Collectively, these Canadian dollar drivers add up to a loonie at parity this year, and dropping to USD 0.97 in 2013.

China is seen by many as an upcoming reserve currency, but that day is still a long way off. The relatively early state of economic development, the lack of full currency convertibility and the controlled value of the currency are among a number of structural economic features that together weigh against an imminent role for the RMB on the global stage.

Given the paucity of alternatives, shouldn't the greenback be even stronger? Maybe, but it too has weaknesses. Monetary policy has been extremely loose -- in the last four years, the Fed has tripled the monetary base. Emerging markets have diversified into gold and other currencies. Also, sluggish U.S. performance against more rapid emerging market growth has reduced America's share of global trade to 10 per cent from 15 per cent in 2000. Some countries are responding by denominating commodity trade in other currencies, and also increasingly opting for financing in local currency.

Many of these factors will dissipate when the U.S. economy resumes its role as global growth engine. But in the next global growth cycle, the greenback will not be the only game in town. Massive infrastructure plays and resource projects in emerging markets point to a growing role for local currency financing. China stands out as the world's second-largest economy and the largest exporter, yet its currency makes up only 0.3 per cent of the global foreign exchange market. That is already changing rapidly. Opportunities in Brazil are stoking demand for real-based financing. Other fast-growing emerging markets are poised to do the same as world growth resumes.

The bottom line? On both Canadian and world stages, the greenback still takes the lead role. But as we move into the next growth cycle, others will play increasingly significant supporting roles.