This HuffPost Canada page is maintained as part of an online archive.

Is the Loonie Really Losing it?

Stable is not a word that can be used to describe much in today's economy. A notable exception is the Canadian dollar. The loonie has soared in a reasonably tight range around parity with the U.S. dollar for 3 years now. Although exporters would prefer a lower level, the stability has made activity and cash flows somewhat more predictable. Now, the loonie is losing some loft; what's happening?
This post was published on the now-closed HuffPost Contributor platform. Contributors control their own work and posted freely to our site. If you need to flag this entry as abusive, send us an email.

Stable is not a word that can be used to describe much in today's economy. A notable exception is the Canadian dollar. The loonie has soared in a reasonably tight range around parity with the U.S. dollar for 3 years now. Although exporters would prefer a lower level, the stability has made activity and cash flows somewhat more predictable. Now, the loonie is losing some loft; what's happening?

A decade ago, predictions that the Canadian currency would rise to 75 cents U.S. seemed outlandish. Some firmly believed that we were headed for 50 cents, and that fixing the rate in the mid-60s would be a good deal. No one foresaw the 8-9 per cent annual appreciations that blew past the "wackiest" forecasts and for a time took the loonie well north of parity. After that run, few were expecting stability.

Not long ago, even fewer were expecting a drop in the dollar. After all, high commodity prices were only expected to rise more if and when the world economy ever recovered. Faster growth would also lead our interest rates north -- and perhaps more rapidly than in the US. Many expected an ailing greenback to boost the loon, as "flight to quality" plays ebbed. And then there's Canada's halo effect: our great financial, fiscal and natural resource conditions, with their magnetic pull on foreign capital.

Things haven't quite worked out that way. The bumbling world economy has revealed that we are not running out of resources at the pace many feared, quieting speculative activity and bringing prices down. Copper, the prescient metal, is down 17 per cent from its peak, and with it a lot of other base metals. Significant new oil discoveries have taken the heat out of fuel prices. Oil has now been below the triple-digit zone for nine months, and is 30 per cent below its peak. Food and forestry prices are bucking the trend, but all told, the weakness is weighing on our commodity-influenced currency.

In addition, interest rates may not boost the loonie much after all. Sure, Canada faces tight constraints going into the next growth cycle, but high consumer debt, a faltering housing market and public sector cutbacks will likely counter the need for rapid monetary tightening. Moreover, U.S. rates are currently 88 basis points lower than ours, and have further to go to get to normal levels over the medium term -- additional rationale for a softer Canadian dollar in the medium term.

And what of those who foresee a perpetually weak U.S. dollar? Guess again. With some of the strongest economic fundamentals in the OECD, don't count the US out. In fact, the greenback has been on the positive side of currency wars that don't seem likely to abate anytime soon. With exports being the great hope of OECD economies with weak domestic fundamentals, tolerance for appreciating currencies is low. Slow appreciation is a very likely outcome for the greenback, which will further weigh on the loonie.

Finally, there's the halo effect -- which has lost some shine in recent days. High-profile laments of Canada's domestic weakness are causing international investors to pause and reflect. Near-term challenges on the home front will likely continue to temper recent enthusiasm for the loonie, causing it to drift closer to its fundamental value.

The bottom line? The Canadian dollar's recent downward drift makes sense. It looks like its medium-term home will be at the mid- to high- 90-cent level -- possibly lower. It's just in time for a 'growth handoff' to Canadian exporters!

Bank of Montreal Dollar - 1825

Evolution Of The Canadian One-Dollar Piece

Close
This HuffPost Canada page is maintained as part of an online archive. If you have questions or concerns, please check our FAQ or contact support@huffpost.com.