Loonie Expected to Soar in 2008
The Canada eZine - Economics


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Experts say Loonie may rise to $1.20 in 2008

A year ago, with the Canadian dollar worth less than 86 cents US, parity with the greenback was not on the radar screen of most analysts, and dismissed as a "worst-case scenario" by one.

However, the loonie, not only reached but breached parity, rising to a modern-day high of $1.1030 US, before ending the year at $1.0088 US.

And the new "worst-case scenario" is a currency well above parity.

A fear now, however, is that unlike in 2007 when most of the currency's appreciation, according to the Bank of Canada, reflected rising prices for Canadian commodities and solid domestic economic and financial fundamentals, the next surge in the loonie will come from a run on the U.S. dollar.

"That's a worst-case scenario, and it's not a far fetched scenario," says Jayson Myers, economist and head of Manufacturers and Exporters Canada.

"I've seen forecasts that show that the U.S. dollar might have 15 per cent more to fall against other major currencies," says Myers, whose organization represents the industry hardest hit by the more-than-60-per-cent rise in the Canadian dollar since early 2003, including last year's 15-per-cent surge.

"It's very worrisome," he says, noting that would put the dollar in the $1.20 US range. "That would be a very bad situation, not just for Canadian manufacturers, but for the Canadian and U.S. economies as well."

Mario Iacobacci, director of research at the Conference Board of Canada, also warns that fears of a run on what is still the world's main reserve currency are not "far-fetched" and would be very bad for the U.S., Canadian and global economies.

It's the Americans' currency, but it's the world's problem, Iacobacci says.

And he notes how easily such a run could start, pointing to the impact last fall of a comment by a Chinese government official that his country, the world's largest foreign holder of U.S. dollar reserves, might shift more of those reserves into a stronger currency such as the euro.

"The reaction was very swift," Iacobacci recalls.

The seemingly innocuous comment torpedoed the greenback and sent the loonie to its highest level since the last time there was a run on the greenback - during the U.S. Civil War when a Confederate army was marching on Washington.

There's little authorities here would be able to do to prevent the Canadian dollar from soaring if there was a real loss of confidence in the U.S. dollar, Iacobacci warns. In fact, there's little the U.S. authorities could do either to stop a global run on the greenback.

Despite its already deep depreciation against most major currencies over the past half decade, the greenback is still the world's major reserve currency, the one that most governments hold in case they have to defend their own currencies.

"It would be a calamity in economic terms," Iacobacci says.

"The U.S., the Federal Reserve or the treasury, on its own, would not be able to really deal with that kind of situation," Iacobacci says, noting that global currency markets have mushroomed to where the equivalent of nearly $4 trillion US is being traded on a daily basis.

Even a 12-per-cent depreciation in the U.S. dollar, if it were sudden and disorderly, would hurt Canadian exporters directly, who would be paid in a deeply depreciated currency for many of their products, which are priced in U.S. dollars, and it would hit Canada's economy indirectly through a serious contraction in the U.S. economy, Canada's primary export market.

It would take a concerted effort by the world's major central banks to deal with such a crisis, Iacobacci says.

The problem is that they don't appear to have a strategy for dealing with such a crisis, he adds.

"You need to prepare in advance," he says, suggesting the central banks need to determine in advance what amount of support for the currency would be needed in and how it would be delivered.

But even if a run on the U.S. dollar is not be in the cards, a further appreciation in the Canadian dollar may be.

"I'm back to being quite bullish on the Canadian dollar," says Dennis Gartman, U.S. author of the influential financial newsletter that bears his name and is read by traders around the world.

Gartman, who two years ago predicted the loonie would reach parity with the U.S. greenback, says the Canadian dollar is poised to rise even further, but on its own merits, and not because of a run on the greenback, which he suspects is already oversold on world exchange markets.

"It's time once again to say the major trend is in favour of the Canadian dollar to rise, and not just relative to the U.S. dollar, but to rise even more relative to the euro," he says.

In fact he expects the loonie will be one of the strongest performing currencies this year.

"Has anything changed fundamentally that was driving the Canadian dollar higher relative to the euro and the U.S. dollar? The answer is no," he says. "Canada has the things that the rest of the world needs."

"You've got wheat, you've got canola, you've got base metals, precious metals, and most importantly you've got energy," he notes, adding Canada also has water, suggesting that over time that will become an increasingly precious commodity.

While Gartman won't make a prediction on how high the loonie will go, he "bet it makes a new high relative to the U.S. dollar ... ."

"I think we'll see Canada versus U.S. dollars higher than the best levels that were seen in November," he says, indicating it will at least top the $1.10 US, breached in 2007, and set a record high against the euro as well.

However, he also expects the Canadian currency will eventually retreat back to parity against the greenback.

There are others who predict the loonie's retreat will come sooner and go further.

The federal export promotion agency, in its latest forecast says: "We expect to see it below 90 cents US by the end of 2008. "

The reason is that a global economic slowdown will ease demand for Canadian export commodities and in turn reduce the speculation, that drove the loonie to new highs in 2007, it says.

Updates

  • January 11th: Canadian dollar drops to 98 cents US on weak hiring reports, slightly higher jobless rate in Canada and looming recession in the United States. Meanwhile gold soared to $900/ounce on recession worries.
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