Want to interact with other informed Canadians and Globe journalists? Join our exclusive Globe and Mail subscribers Facebook group
When the Canadian dollar touched 76.92 cents (U.S.) back in mid-February, I recall saying that it had moved too far, too fast, and since it was largely due to shifting hedge fund short covering, the move would be temporary and to expect a return to a range between 71.43 cents and 74.07 cents before long.
Well, courtesy of Donald Trump's well-publicized tariff hikes on Canadian dairy products and softwood lumber, the markets took the loonie down to its weakest level in 14 months.
While these "American First" manoeuvres made front-page headlines everywhere, the reality is they will end up trimming Canadian real GDP growth by less than 0.1 per cent.
The loonie bears doth protest too much.
The Canadian dollar actually is more than twice as undervalued today, based on the underlying fundamentals, than it was at the sub-70 cent lows back in the opening months of 2016. Consider that it is barely a nickel higher now even though the oil price has nearly doubled! In fact, the loonie is a good four cents weaker now than it was in the spring of 2009 when the Great Recession was at its most sinister point and oil was bottoming at $37 per barrel. Sort of puts a 73-cent dollar alongside a near-$50 per barrel oil price into some needed perspective.
At today's near-$50 oil price, the Canadian dollar "should be" closer to 79 cents than 73 cents. The flip side of that is that the Canadian dollar is currently "priced for" $40 per barrel oil.
At least it's nice to know that there is considerable downside protection to the currency here.
It's not as if we need to turn bullish on the oil price to be more positive on the currency – and yet we know that on the supply side, sub-$50 oil simply does not work and it would take a renewed global recession to get us back down to $40.
I say this knowing full well that oil has been drifting lower in recent weeks – likely temporary as there is every reason to believe that by mid-year, and even with the ramp-up in U.S. production, we will have cleared out much of the current excess inventory by then.
So what has been holding the Canadian dollar back? It has been the Bank of Canada.
The Bank's two "insurance" rate cuts following the collapse in oil prices in late 2014 along with Fed hikes have pushed interest rates far below U.S. levels. This was done principally to provide an offset to the detonation in the energy patch and the knock-on effects, and the policy has worked. Time to move on.
The detonation is far behind us, as are the aftershocks.
The Alberta economy has stabilized, albeit at a depressed level.
Canadian real GDP growth has averaged a 3 per cent annual rate over the past four quarters, now surpassing the 2.2 per cent pace in the U.S.
Fully 175,000 net new jobs have been created in the past six months, and every one of them in full-time positions.
And we have an epic housing bubble in Southern Ontario and the onset of manias in other urban areas, courtesy of the central bank's move to drag interest rates deeper into negative terrain in real terms.
It's time for the Bank of Canada to start hinting at taking back those emergency rate cuts, which are no longer needed or desirable.
Core inflation may be 1.5 per cent but a 0.5 per cent policy rate in that environment makes no sense in the context of faster-than-expected real growth and an official acknowledgment at the last policy meeting that the fabled output gap will be closing a little ahead of schedule.
So even if oil hangs in at today's level and the central bank does the right thing, which then eliminates the interest rate discount vis-à-vis the U.S., then we would be talking about the loonie gravitating to 82 cents.
And if alongside this elimination of the interest rate differential we were to see oil touch $60 per barrel – we think there is a good chance we will see this by year-end – we would be talking about a loonie at 84 cents.
I know, it sounds outlandish. But guess what? This is exactly where it was before the trapdoor opened up underneath the oil price in the fall of 2014.
I know that the knee-jerk reaction is that in the aftermath of the tariffs imposed on Canadian dairy products and softwood lumber, trade issues have emerged as a cloud. And these concerns have been reinforced by rumblings out of the White House that it wants an early renegotiation of the North American free trade agreement.
Well, the tariffs have a negligible impact on GDP growth, for one thing.
As for NAFTA, bring on the talks. As if Canada benefited from this deal. The only amigo that did was Mexico. Canada never wanted NAFTA – it was imposed on us.
Consider that on the eve of NAFTA being enacted in 1994, Canada enjoyed a trade surplus on goods and services of $9-billion (Canadian). That surplus has since swung to a $48-billion deficit! Before NAFTA, a Canadian deficit in autos and parts – for so long our bread and butter – was unheard of. We now have been running $20-billion deficits on this file each year since 2013.
In fact, since NAFTA came to be, Canadian real GDP growth averaged 2.5 per cent annually, and guess what? Net foreign trade has actually subtracted 20 basis points from our headline growth per year, on average, over that time frame.
So instead of being a deer in the headlights over a rewriting of NAFTA, Canada would actually stand to benefit. And this is therefore no reason for the BOC to still be running a policy that was aimed at an environment of $30 (U.S.) oil and a Canadian recession.
Finally, a rewrite of NAFTA may allow Canada to settle some trade scores with our friends south of the border, seeing as we have a White House bent on eliminating deficits.
Well, Canada is running trade deficits with the U.S. in many areas, ranging from chemical products to rail equipment, to food and beverages, to electrical and electronic equipment, to steel to shipbuilding, to books and newspapers.
All that aside, let's not get distracted to the major point. The Canadian dollar is more undervalued now than it was when it moved off those cycle-lows 15 months ago. If it were an equity, I would rate it a "buy."
David Rosenberg is chief economist with Gluskin Sheff + Associates Inc. and author of the daily economic newsletter Breakfast with Dave.
David Rosenberg