Canadian dollar plunges

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October 23, 2008

By KRISTINE OWRAM The Press Republican Thu Oct 23, 2008, 12:00 AM EDT

TORONTO -- Experts say the plunging loonie could actually help Canada weather a global economic slowdown, by making exports more competitive in the United States and elsewhere.

However, the impact on North Country retailers might not be so positive.

Canada's manufacturing sector suffered as the dollar soared above parity with the U.S. greenback last year for the first time in decades, making Canadian goods relatively more expensive and hurting export-based industries, particularly the auto and forestry sectors.

One hope for Canadian exporters is that the loonie's drop may soften the impact of a worldwide recession.

"It will help, but to the extent that the weak Canadian dollar is also a symptom of poor global economic growth, it's more of a cushioning of the recession rather than a cure for it," said Avery Shenfeld, a senior economist with CIBC World Markets.

He said the Canadian economy is too tightly intertwined with its American counterpart -- reeling from the continued financial meltdown -- for the currency exchange rate to reverse its woes completely.

The Canadian dollar closed Wednesday at 79.70 cents US, down 2.69 cents from the previous close.

The loonie -- which hit its all-time high of 110.31 cents US almost a year ago, last Nov. 7 -- hasn't been below 80 cents since mid-2005.

Local impact

North Country retailers and tourism leaders said Canadian's flocked to the area during the last few years, when their dollar was strong compared to its U.S. counterpart.

Champlain Centre mall reported traffic counts were up 27 percent through this summer. That was after a 50-percent increase in 2007 and a 400 percent increase in 2006, roughly when the Canadian dollar began to rise.

The mall parking lot was packed Columbus Day weekend, at least partly due to Canadian shoppers coming to Plattsburgh for the opening of Target.

The Plattsburgh-North Country Chamber of Commerce reported traffic counts at the Champlain border crossing were up 4 percent, about 80,000 visitors. That was despite construction that increased the wait to cross the border.

Liquor and Wine Warehouse saw an 80-percent increase in business with Canadian customers this summer.

Occupancy rates at area hotels increased from 60.9 percent in 2006 to 68.5 in 2007 and 73.3 in 2008. The latter figure is expected to decrease because fall and winter, with the exception of foliage season, is typically slow.

Commodity Currency

The Canadian dollar is considered a commodity currency, meaning the decline in the price of crude oil, metals and minerals due to shrinking global demand has been a major factor in the loonie's fall.

December crude contracts fell $5.43 to settle at US $66.75, the lowest close for a front-month futures contract since June 13, 2007, when crude settled at $66.26.

But the relative strength of the U.S. dollar against other major currencies is also having a major impact, said Steve Malyon, a currency strategist with Scotia Capital.

"It is a bit counterintuitive to have all this U.S. dollar strength, given that the subprime crisis started in the United States, but I think the key observation is that it started in the United States but it didn't stop there," Malyon said.

"It's sort of an ugly contest in global currency markets. The U.S. dollar doesn't look terribly great, but neither do a lot of other places."

In fact, Malyon said, the loonie has fared comparatively well next to some of its peers -- losing about 18.5 percent of its value against its U.S. counterpart from July 1, while the New Zealand and Australian dollars have lost 22 percent and 30 percent, respectively.

The euro has seen a decline similar to that of the Canadian dollar.

The U.S. dollar has also been given a boost by investors eager to buy the currency to pay back debt, Shenfeld said.

"Investors that had borrowed in U.S. dollars and are now seeing losses on their investments are attempting to pay back their loans and are buying U.S. dollars in the process."

Rising prices for everything from bananas to computers are another persistent worry when the dollar drops, as goods imported from the U.S. and other countries suddenly cost more.

But this time, a global slowdown in demand combined with lower costs for raw materials is making consumer goods cheaper and should therefore insulate the Canadian economy from inflation, said Malyon.

"The decline in commodities has been far greater than the decline in the Canadian dollar," he said.

"When you net it all out, we have a fairly significant disinflationary pulse that's going to work its way through the economy."

Malyon added that this should allow the Bank of Canada to continue cutting interest rates to stimulate the economy, at least in the short term.

The central bank lowered its overnight lending rate by a quarter point on Tuesday after a half-point cut on Oct. 8 in an attempt to stimulate the economy by encouraging borrowing.

George Davis, a senior technical analyst at RBC Capital Markets, said he expects the loonie to continue its decline in the short-run.

"Until we see credit markets stabilize, which would also imply some sort of stabilization in commodity and equity markets, I think that's going to imply weaker days for the Canadian dollar ahead," Davis said.

But Shenfeld sounded a more optimistic tone.

"In the near term, the continuing turmoil on financial markets is going to put some downward pressure on the Canadian dollar, but we likely have room for a substantial recovery when the global economy is back on its feet," he said. "I wouldn't expect this to last that long."