Go to the Globe and Mail homepage

Jump to main navigationJump to main content

Report on Business

Economy Lab

Delving into the forces that shape our living standards
Best Business Blog, EPPY awards, 2011 and 2012

Entry archive:

Economy Lab has moved

Only Globe Unlimited members will now have access to a wide range of insightful commentary
and analysis on the economy and markets previously offered on this page.


Globe Unlimited subscribers will be able to read these columns,
written by some of Canada’s most deeply respected economists,
such as Christopher Ragan, Sheryl King, Andrew Jackson, and Clement Gignac,
as part of our ROB INSIGHT section.


All of our readers will still be able to browse the Economy Lab archives and read our
broader coverage of economic data and news by accessing their 10 free articles a month.


Learn more about Globe Unlimited and how to subscribe.

(Ryan Remiorz/The Canadian Press)
(Ryan Remiorz/The Canadian Press)

Economy Lab

Good try by Carney, but traders like our petro-loonie Add to ...

Bank of Canada Governor Mark Carney said Wednesday that trading the Canadian dollar as a petro-currency is a “recipe for losing money” over the medium term.

“It is far too simplistic to talk about the Canadian dollar as a commodity currency, let alone a currency that moves consistent with one commodity,” Mr. Carney said at a press conference.

More related to this story

To that, BMO’s Douglas Porter offered this rebuttal (see first chart below):



Mr. Porter ran the loonie’s exchange rate against the FIBER Industrial Materials Price Index going back 10 years. His conclusion: the Canadian dollar has traded in concert with commodity prices 93 per cent of the time over the past decade – “leaving seven per cent for the non-simplistic to explain,” Mr. Porter said.

It’s going to be extremely difficult for Mr. Carney to persuade traders to stop grouping the loonie with currencies such as the Australian dollar. That perception, right or wrong, will keep upward pressure on Canada’s currency.



The Bank of Canada’s latest Monetary Policy Report has charts, too. While not superimposed like Mr. Porter’s, the MPR on page 15 shows the loonie has climbed since the start of the year, even as commodity prices have declined. That supports Mr. Carney’s argument. The loonie apparently is being supported by other factors at the moment, probably increased demand for AAA-rated government debt.

Part of Mr. Carney’s message Wednesday was that the rules governing Canada’s economy have changed. Because Canadian crude prices are well below the world price, rising gasoline prices represent a drag on the Canadian economy because there is no offset from oil profits. Therefore, it would be wrong to trade the Canadian dollar with the world oil price because higher pump costs are hurting the economy.

But see the second chart below, courtesy Marc Pinsonneault at National Bank Financial:

The share of commodities to overall Canadian exports has surged over the past decade to 64 per cent from 42 per cent at then end of the 1990’s. There’s a considerable price effect there, but Mr. Pinsonneault notes there also is a big increase when prices are factored out. In volume terms, commodities represent almost 49 per cent of Canadian exports compared with 45 per cent in 2007.

As go commodities, so goes Canada’s economy. And it’s reasonable to expect the dollar won’t be far behind. “On exchange markets, the loonie is considered a commodity currency…That market perception is founded,” Mr. Pinsonneault said in a note to clients.





In the know

Most popular videos »

Highlights

More from The Globe and Mail

Most popular