Canadian businesses should prepare to live with the "new normal" of a strong dollar.
The dollar broke through 99 cents U.S. Wednesday, hitting its highest level in 20 months, and parity with its U.S. counterpart is in sight. The currency retreated only somewhat later in the day, closing just below the 99-cent mark, at 98.98 cents, having shot higher for 12 of the past 13 trading days.
Analysts credit Canada's faster-than-anticipated recovery that has included earlier job creation than in other countries, the Harper government's pledge to wipe out most of the country's budget deficit within five years, firm commodity prices and expectations that the Bank of Canada will raise borrowing costs before the U.S. Federal Reserve, which pledged again Tuesday to hold its benchmark rate near zero for an "extended period."
Some economists believe the dollar will hover at or close to parity for the foreseeable future, what David Watt, senior currency strategist at RBC Dominion Securities, said could be the "new normal."
When the dollar shot through parity in the summer of 2007, it was a marked adjustment for export-sensitive industries whose products cost more abroad as the currency rose. That was more of a shock then, compared to now, as manufacturers have had time to adjust in terms of pricing and costs, economists said. In fact, the manufacturing numbers released by Statistics Canada earlier this week, which again showed sales rising, indicate that industry is managing to cope, in part because the higher currency makes imports cheaper, allowing companies to buy new machinery and equipment to become more productive.
Cheaper imports also act as a brake on inflation and spur domestic spending.
Industry Minister Tony Clement Wednesday also credited lower taxes brought in by his government and efforts to reduce companies' dependence on exporting to the United States with helping them adapt.
"All of these things have a cumulative effect that we expect will more than overcome the fact of the high dollar," Mr. Clement told reporters. "The new normal is that you don't just rely on a low Canadian dollar as your productivity edge and I think most businesses have gotten that point now."
But there is still an ongoing adjustment. While not all observers see parity as sustainable, some economists don't believe the currency is heading down more than a few cents any time soon.
Scotia Capital, for one, forecasts that the dollar will hit parity by June - the end of the second quarter this year - climbing to about $1.02 by the end of the third quarter, about $1.03 by the end of the year and about $1.05 by the end of 2011, assuming the U.S. economy rebounds robustly in the next two years and commodity prices remain firm.
RBC's Mr. Watt said he doesn't see the currency reaching its previous high, and it may dip below parity for stretches because as the Fed starts to raise rates it will give a "short-term" boost to the greenback.
Still, Canada's dollar will be among the best performers among all major currencies through the end of this year and could "linger around parity through 2011 and probably after that," he.
There is no doubt where the loonie is headed, said Scotia Capital currency strategist Sacha Tihanyi, but just when that happens "depends on whether we get that speculative push."
The tipping point could come next month. Bank of Canada Governor Mark Carney is widely expected to use an April 20 interest rate decision to give some hints about a tightening campaign that could start in July or earlier, and he releases his latest projections for the economy two days later.
Mr. Carney also could offer some clues in a speech in Ottawa on March 24.
The last time the loonie matched the greenback, largely thanks to skyrocketing oil prices, it rose well above that level, reaching $1.10 in September, 2007, before tumbling back. What finally pushed it below parity in July of 2008 after 10 months was the onset of the global financial crisis, the resulting drop in energy prices and investors flocking to the perceived safety of the U.S. currency.
This time, oil is playing a lesser role, because commodity prices seem to have topped out weeks ago after surging as global demand returned.
And while the worldwide recovery is far from complete, there's nothing on the horizon as dire as when near-panic spread around the globe in the second half of 2008.
Moreover, Canada's enviable fiscal health and its strong banking sector have currency experts uttering the term "safe haven" to describe how global investors view the loonie eight years since it sank to a record low.
"Canada is emerging as a potential safe haven because the market's much deeper and more liquid than some investors anticipated, and we rode through this pretty terrible global economic downturn and the financial turmoil in relatively good shape," RBC's Mr. Watt said. "Looking at the economic backdrop in Canada, and looking at the situation in the United States, we just have to get used to the Canadian dollar lingering at levels that were considered almost unimaginable at the start of this decade."
With a file from Reuters