Stocks are rebounding on Friday after a two-day selloff, but the Canadian dollar isn’t. The loonie slid below 98 cents against the U.S. dollar, hitting its lowest level since July. As recently as September, the dollar was as high as $1.03.
During better days, the Canadian dollar had been seen as a petro-currency, whose health was tied to the price of crude oil. More recent run-ups had been attributed to the stability of the Canadian economy relative to most of the world – especially the United States and Europe, where central bank stimulus programs weren’t exactly dollar– and euro-friendly.
Now, though, the dismal-looking domestic economy is taking most of the blame for the Canadian dollar’s woes: Benjamin Reitzes at BMO Nesbitt Burns noted that economic growth has likely failed to reach 2 per cent in any quarter in 2012 (the fourth-quarter report will be released next Friday, with economists expecting a reading of just 0.7 per cent at an annualized rate), which helps explain why inflationary pressures have been so low.
“And, the outlook for the Canadian economy isn’t brimming with optimism,” Mr. Reitzes said in a note. “Domestic demand drivers are all but tapped out, as households deal with high debt loads, housing slows and governments retrench. That leaves business investment and exports, both of which need strong U.S. growth before picking up. With that backdrop, the Bank of Canada is in zero hurry to raise rates, not exactly a positive for the currency.”
For investors, the lowly Canadian dollar has boosted the relative performance of U.S. investments – giving them a nice bump after outperforming on a currency-neutral basis.
Consider that the S&P 500 is outperforming the S&P/TSX composite index in 2013 by nearly 4 percentage points, when you ignore currencies. But if you look at the S&P 500 in Canadian-dollar terms, the difference widens to more than 7 percentage points.
In other words, the loonie may be suffering, but diversification is looking good – and the trend could continue.
“We’re not turning full-on bearish on the Canadian dollar just yet,” Mr. Reitzes said, “but further near-term weakness would come as no surprise.”