Businesses and consumers alike should prepare to readjust to life with a lower currency.
The Canadian dollar tumbled by more than a penny to 92.83 cents U.S. Tuesday, hitting its lowest level in more than three years, and several economists say it has further to fall.
The latest drop, triggered by weak trade data, comes as the currency has shed about 7 per cent in the past year.
A weaker dollar has a host of ripple effects. For exporters, volatility in the currency can wreak havoc with business planning, so many have hedged to smooth out fluctuations. For those who haven’t, a weaker dollar helps by making their goods less pricey when sold in the United States, Canada’s biggest market. Conversely, it makes importing productivity-enhancing machinery and equipment more expensive.
A lower loonie is a net benefit to most exporters, said Mel Svendsen, chief executive of Calgary-based Standens, which makes leaf springs and agricultural tillage components. The impact of a falling currency has been blunted by some hedging the firm has done, but, still, “a weaker dollar, over time, is good.”
For travellers, a weaker dollar makes trips to the United States more expensive and cross-border shopping less appealing. And for retailers, it means more shoppers may stay in Canada, but it also, eventually, raises the cost of imports.
Economists have different forecasts for the currency, but they’re all in the same direction. Bank of Montreal chief economist Douglas Porter told a forum Tuesday that he sees the loonie slipping to about 91 cents by the end of the year.
Derek Burleton, Toronto-Dominion Bank’s deputy chief economist, told the same outlook forum, hosted by the Economic Club of Canada, that the currency could decline to below the 90-cent level by early 2015 because of “a large current account deficit and just more international competition for capital.”
Tuesday’s drop came after Statistics Canada reported that the country posted a trade deficit in November and revised what had been an October surplus to a gap, marking 23 consecutive months of shortfalls. The currency sank further after the Ivey purchasing managers’ index showed an unexpected contraction.
At one point, it was at its lowest level since May, 2010, and closed at 92.83 cents.
The U.S. trade deficit, meanwhile, hit a four-year low as imports of oil, Canada’s largest export, fell to the lowest in three years, according to Bloomberg.
Several factors will continue to weigh on the currency, among them stubbornly low inflation and a central bank that sees no rate hikes in the near future. As a result, “we expect the first six months of 2014 to be marked by Canadian dollar weakness,” Bank of Nova Scotia said in a research note Monday.
National Bank Financial said last week it sees the loonie sinking by another few cents in the first quarter of the year. But both NBF and CIBC’s Avery Shenfeld believe the loonie will regain some ground later this year as trade improves.
Canadian exports, which have long disappointed, look to be the country’s main pillar for growth in 2014 amid slower momentum on the domestic side.
Canada has tallied two years of slow growth, but activity is expected to pick up this year. The U.S. is showing real signs of recovery, Europe is on better, albeit still weak, footing and many emerging markets are poised for much higher growth rates than in advanced economies.
“The single best piece of news for the Canadian economy in 2014 is that the global, and specifically the U.S., economic outlook is improving,” said Mr. Porter, a “critical” shift as domestic drivers are no longer likely to be the engines of growth.
Canada’s regional growth has been uneven in recent years, with much of the strength in the West. In the coming year, that divide should narrow as a sturdier U.S. economy benefits export-oriented firms in Central Canada, particularly Ontario, Mr. Porter said.
He expects no interest rate hikes this year, marking the fourth year in a row of no increases, and no move until “well into 2015.” He also sees little likelihood of a rate cut.
The currency may be lower than it was in 2011 and 2012, but it remains above its 10-year average. A decade ago, for example, it traded at below 80 cents.