Our Lovable Loonie: Where or Where Will It Go?
I think about it often. That is the Canadian dollar last November 7th when it briefly flirted above the $1.10 mark touching $1.1009. Some of you must think I have a boring life, thinking about the loonie. Well, let me reassure you. I think about a lot of other interesting things. However, the value of that loonie surely affects the amount of coin jingling around in my pockets. Ditto for everybody else in Southwestern Ontario. Seeing it dip below 98 cents US last week finishing at .9798 US, gave solace to my soul. Maybe that trend will continue.
Predicting the value of the loonie is a little bit of a bloodsport for Canadian commentators. In 2007 the hype reached new levels as the dollar move skyward. Of course the thought last year was maybe if we waited long enough it would reach parity with the US greenback. I thought at the time talk of such a lofty level was a fantasy. In fact when CIBC economist Jeffrey Rubin publicly came out and said the loonie would reach parity by Christmas, I thought he was being irresponsible. So much for what I know. In 2008 the loonie at or over par has become “old hat.”
In fact as an economic prognosticator, watching the loonie isn’t anything like it was last year. Smashing records is so much more exciting than falling back below par to values which are a bit more traditional for loonie watchers. Where it goes next, of course nobody knows.
To give you a little perspective in January 2007 the loonie briefly dipped below 85 cents US. Eleven months later it hit $1.10 US. I just happened to be giving a presentation the day it dipped below 85 cents and when I announced that to my conference audience, you could actually hear growns from the participants. At that time with grain futures buoyant, many farmers were hoping for a lower dollar to boost cash prices.
On the same day a barrel of crude oil had dipped to $58 US/barrel. With oil catching fire many analysts said the loonie was simply a “Petro-currency”. As oil goes, so goes the loonie. It was easy to believe that last year. However, since November 7th, 2007 that argument doesn’t hold as much water as we’ve seen the loonie fall and oil go up. I guess there is a limit to every correlation.
In my mind I never believed the loonie/oil correlation. What I thought more relevent in this debate was the value of the American dollar. As it tanked, it brought down the value of every commodity because it was the world’s default currency. So as the US greenback went down, oil went up and the Canadian dollar also went up against the US dollar. It wasn’t rocket science.
What made this scenario worth watching was the sub-prime mortgage problem in the US. With billions of dollars in bad paper on the books of many financial firms world wide, it has a hugely negative effect on American spending. The US Federal Reserve kept decreasing interest rates, which is effect was like throwing everybody an interest extension or a “life line” hoping for better economic conditions ahead. And if that ever happens, the greenback would gain back some of it value and the huge spectre of mortgage default might pass. In effect, it was a great leap of faith.
At the same time our Canadian federal government is running a “deficit”! Oh my. We are not used to that. For April and May of 2008, the federal government ran a surplus of $517 million. No, that’s a long way away from the $40 billion dollar deficit ran in the Mulroney era. However, when you live in a country which has had 11 successive years of budget surplus, even a two month budget deficit doesn’t quite sound right. Hopefully after the next ten months economic conditions will come together.
All of this has an effect on the value of the loonie. For many Canadians in Ontario and Quebec, whose employment and economic well-being depends on a strong manufacturing or agricultural base, the rising Canadian dollar has been a disaster. Employment especially in the manufacturing sector has plummeted largely because of the higher loonie and now much higher energy costs. At a certain point the now 97 cent loonie might start to resemble a trend. Will a loonie in the 80′s be in our immediate future?
I would be a fool to answer that question because after I told the conference audience the loonie had dipped under 85 cents that day, I continued by saying many analysts say its going to 78 cents in four months time. However, it went to $1.1009 eleven months later instead. So much for prognostications. I hope you have more luck with it than me.