‘Currency instability’ now a serious concern for Canada

TORONTO ? Canada’s economy is being threatened by “currency instability” because the loonie’s rapid decline against the U.S. dollar is hurting business and consumer confidence, economists warn.

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The loonie fell last week below 70 cents from the U.S. dollar for the first time since 2003, using the currency trading just under 69 cents on Monday. It’s fallen 33 percent from the greenback previously 24 months, a pace that National Bank of Canada’s chief economist, Ste?fane Marion, notes is “without precedent.”

The Bank of Canada is likely to address the loonie’s collapse when it holds its rate of interest announcement Wednesday.

“Currency instability has become a concern, and that we think the Bank of Canada must take note,” said Marion. “For Canadian businesses, currency depreciation has sent the price of machinery and equipment (73 percent which is imported) to a new record high.”

The loonie was last at parity with the U.S. dollar in early 2013. While parity was a boon for consumers, specially those who bought goods or travelled south of the border, it hurt manufacturers who saw sales decline his or her goods became more costly to sell to international buyers.

While those same manufacturers welcomed a lower loonie, the speed from the recent plunge has unsettled some businesses. Marion asserted by his team’s calculations, the loonie must have shed about 10 cents from the U.S. dollar previously couple of months. But it has instead fallen by 25 cents.

“A volatile currency is every bit as bad for planning as volatile inflation,” said Douglas Porter, chief economist of BMO Capital Markets. “I’ve always found it interesting the Bank of Canada is really worried about keeping inflation stable to help businesses and consumers plan and yet it’s almost as if the currency is a complete afterthought.”

The loonie’s rapid drop continues to be exacerbated by crumbling oil prices and monetary divergence, like a strong American labour market and solid economic growth led the U.S. Fed to increase rates of interest in December. The Bank of Canada, meanwhile, lowered its rate in one percent at the beginning of 2015 to 0.5 per cent by the end of the year.

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The market is currently pricing in a roughly even chance that the Bank of Canada will cut interest rates further to 0.25 per cent in a few days. While Porter recently made a call that the bank would cut rates at the meeting, he noted Monday that the loonie’s collapse may be the one reason that will keep the bank on the sidelines this week.

Marion said that in order to help create some stability for the loonie, the financial institution of Canada shouldn’t cut rates of interest now. Doing this would risk sending the currency as low as 66 cents in the near-term, he explained.



That would bring the loonie inside a stone’s throw of its lowest rate to date from the U.S. dollar of 62.70 cents, an indication achieved in 2002 when Jean Chrtien was Pm and David Dodge was Bank of Canada governor.

“In our opinion, the Bank of Canada are the best to keep its powder dry this month and act, if need be, following the next federal budget if this will be better able to assess fiscal support towards the economy,” Marion said.

While the loonie’s rapid decline is unsettling, Peter Hall, chief economist of Export Development Canada, sees pointless for the Bank of Canada to act because of it. He notes that any unwanted effects on business confidence are likely temporary.

He also said the export benefits of a minimal loonie take years to fully filter into the economy, and those advantages will start showing themselves in the upcoming year, helping ease any currency worries.

“The outcome of the lower Canadian currency aren’t felt right away,” he explained within an interview. “However when companies become believing that this really is pretty much a permanent thing – that they’ll rely on the Canadian dollar much lower than parity -then they’ll begin to invest based on that.”

“From the moment the currency started tumbling in 2014, we’ve seen some investing coming on stream, however it takes time,” he added. “We think that’s going to be a 2016 story – companies taking advantage of the currency advantage that we have.”