Waiting to Exhale

A few years back when the Canadian dollar was at historic lows, my best friend and her husband from Baton Rouge, Louisiana, paid me a visit. Every time the two of us went out shopping (we have both since joined SA: Shopaholics Anonymous), my friend’s husband would just say, “Have fun, honey,” while mine would start with uncomfortable, fake coughs, giving me odd-looking winks to go into the kitchen for a quick and very private sendoff.

At the time, the entire ritual annoyed me beyond belief, though, and I hated to admit it, he was right. His argument was that my purchase power was well below Marie Ann’s. He insisted that for her greenback, she could haul home much more stuff and that I should not even try to keep up with her. Well, I did my best not to listen to my husband, but with the loonie being about US$0.62, I didn’t stand a chance.

Yet, for the last four years, the Canadian dollar has most certainly earned its shine back, gaining over 41% against the greenback. Moreover, over the period, our dollar went from a joke to being the world’s fifth strongest currency.

As of late, however, analysts agree the Canadian dollar has peaked and it is bound to head south sooner rather than later. (I guess I should have gone on another shopping spree with Marie Ann sooner. I wonder whose husband would have behaved awkwardly then!)

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There are a number of reasons pointing to the loonie’s impending demise. For starters, the major driver of the Canadian economy– commodity prices–are about to buckle or have already started. Unfortunately, the loonie did not factor in this part of the commodity’s cycle just yet.

Also, since the loonie soared, Canada’s trade position has deteriorated. Many of our exporters found their order logs decline because our products simply became too expensive to our trade partners, while fewer and fewer new importers came knocking on our doors. Finally, the U.S. economy is slowing down, and since the U.S. is our most important trade partner, this slowdown is bound to have a negative impact on our loonie, among other things.

How do I feel about loonie sliding down? Well, as any patriot, I like to see our currency going strong. However, I also cannot negate or ignore market and economic realities. But, unlike some analysts expecting loonie to fall back to or below US$0.75, I believe it will hold its own above US$0.80.

Why? Simply, although the fact remains that the U.S. is still Canada’s largest trade partner; our respective economies are clearly diverging. One among the most obvious differences concerns interest rates.

While the U.S. Fed is clearly biased towards raising rates, the Bank of Canada is staying put for now, and even contemplating decreasing them come January of next year. Then there are other, perhaps less visible, but certainly more striking differences, such as budget and trade account deficits in the U.S. versus surpluses in Canada.

In a way, a sliding loonie could be a good thing. By making our markets more affordable to foreign trade partners, the loonie just might tip the supply and demand scales in the right direction. With increased demand for our products and services, the Canadian economy could receive the necessary boost to get fired up again. “Waiting to exhale” might not be such a bad thing after all.