Editor Roundup: Implications of Loonie at Parity
With the Canadian dollar hitting parity with the US dollar today, for the first time in my lifetime, lots of effervescent commentary is emerging- raising key questions for the path of the Canadian dollar, the oil market and the Canadian economy.
Sherry Cooper of BMO revisits the dollarization debate of five years ago to talk about Canadians purchasing power – though with a twist not often seen in 2001, if the US and Canada were to share the same currency it should be at par. She does conclude that politics and institutions of a shared currency between the US and Canada (to say nothing of a NAMU including Mexico) are beyond the pale. But she holds out hope for the removal of exchange rate costs for consumers and businesses.
But transportation, security and regulatory issues would seem to provide similar costs. Not too mention that being tied into US monetary policy probably makes no more sense for Canada than for the GCC – for different reasons.
Also at BMO, Douglas Porter updates his analysis of Canadian sticky prices from a few months back – finding little narrowing of prices for goods common to the US and Canada – which explains the revival of cross-border shopping. He argues that although Canada’s manufacturing sector (among others) have been challenged by the Loonie’s run– with consumers yet to benefit from higher purchasing power.
While we have discovered some fractional narrowing in the prices of some goods over the past three months, the currency’s latest sprint has completely offset those modest moves. Thus, we find that the average price gap on a basket of assorted goods is now roughly 24% at today’s exchange rate—that is, Canadian dollar prices are 24% higher than U.S. dollar prices on identical goods.
Of course the Canadian dollar was not alone in reaching heights against the dollar today – the Euro broke 1.40 and crude oil prices are soaring. The loonie has been the largest beneficiary of the greenback’s weakness – rising some 16% this year. The loonie has been helped by the growing role of energy in Canada’s trade and related M&A inflows – with the result that the correlation between oil and the loonie has increased. Signs point to this continuing if global oil demand persists – particularly as the Canadian dollar has increasingly become an oil play. Given declining production in some aging fields, investment restrictions and concerns about resource nationalism, CIBC recently asserted that over half of the investable oil reserves are in Canada. Many players, including Abu Dhabi’s oil company TAQA have recently entered the market. TAQA, cash-rich, purchased during recent tumultous credit conditions – as a way to diversify its sources of income and perhaps place a oil price floor – given that production costs from the oil sands are are much higher than in Abu Dhabi. is unlikely to change, but the terms underwhich investors
Earlier this week the Alberta royalty review suggested that the province should get a higher share of oil sands proceeds, which are among the lowest royalties among oil-rich regions. If the province’s share is increased, what impact will it have on these inflows and the loonie? Or on the ability Alberta’s to provide the infrastructure needed for further oil sands expansion and adding value to its oil exports. Not to mention debates on how it should be distributed among Albertans (and as a part of Canada’s federal balance).
The rising loonie – assuming its current level is not too much of an speculative overreaction – poses a great challenge for the Bank of Canada – which held off on its planned tightening in September as central banks injected liquidity and the Canadian credit market was beginning to recover from the ABCP mess. The loonie is now above the level projected by the BoC – but core inflation seems stubborn not withstanding yesterday’s lower reading. TD economists argue that the loonie is having only a moderate effect on inflation, partly because Canadian companies are not taking enough advantage of investment opportunities. And housing costs – the largest contributor to inflation show few signs of slowing – another difference with Canada’s neighbor to the south.
Which brings us to the big question of the day – Canada is among the economies most vulnerable to a US slowdown – about 75% of its exports are US bound – the auto sector is challenged, forestry exports are down (US construction woes added to an appreciating currency) as is tourism. Avery Shenfeld of CIBC argues that the Canadian dollar reached parity because Canada was able to keeping unemployment low while weathering a terms of trade shock difficult for Canada’s export sector. Domestic demand, especially from the west and from the services sector and tight employment is contributing to housing cost rises and fuelling inflation and continued above potential growth – but for how long?
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