As oil and gold prices soared Tuesday, and the loonie continued its march toward parity with the weakened U.S. dollar, market watchers weighed in on the implications.
The high loonie 'really puts Canada into a very dangerous position'
Not everyone is cheering the parity play. Peter Hall, vice-president and chief economist of Export Development Canada, says the high value of the Canadian dollar "is weighing heavily" on Canada's export prospects. With the loonie pushing past 97 cents, it makes it more difficult for Canadian exporters to sell their products in global markets that are only just emerging from the recession.
This cost disadvantage could choke Canada's economic recovery, Mr. Hall said in an interview.
"In Canada right now, even if the Canadian dollar just maintained 93 cents, we could lose 2 per cent to 3 per cent off GDP [gross domestic product]next year. And, given that's all the growth anyone is forecasting, that really puts Canada into a very dangerous position."
Why the loonie has taken off
The rebound in global stocks, firmer commodity prices, the sagging United States dollar and solid Canadian economic data have "sent the loonie on a tear," economist Douglas Porter of BMO Nesbitt Burns said in his morning note to clients.
"The Canadian dollar rose a hefty 3.4 per cent last week, not too far behind the 4.4-per-cent jump in the Aussie dollar. Commodities lent a helping hand, rising 3.8 per cent on the week, while the trade-weighted U.S. dollar fell more than 1 per cent," Mr. Porter wrote, adding that the loonie was "pretty much flying solo" before the Thanksgiving weekend on strong employment numbers and a healthy business outlook survey from the Bank of Canada.
"With further strength yesterday and commodity prices still rolling, the Canadian dollar has pushed above 97 cents to start today. Parity beckons." 'Par is a foregone conclusion; how far past par things can go is the only real question'
Investment adviser Dennis Gartman, author of the widely-followed Gartman Letter and a long-time Canadian dollar bull, said Tuesday the loonie is moving inexorably toward par and beyond. The "only real question now" is how far beyond parity the Canadian dollar will move against the weakened greenback.
"Canadian manufacturers will wail and gnash their teeth at this prospect, and even the Canadian government will metaphorically rend its clothes and bemoan the strong and stronger Canadian dollar, but they will be powerless to stem the tide," Mr. Gartman said in his daily letter.
Soaring dollar 'likely to draw the Bank of Canada's ire to an even greater degree'
The Bank of Canada's meeting next Tuesday, and subsequent monetary policy report Thursday, will be particularly interesting "as the market will be watching whether the bank ratchets up its now tired verbal measures against the loonie," Scotia Capital currency strategist Sacha Tihanyi said Tuesday.
"However, with all currencies gaining against the U.S. dollar, it is difficult for the bank to justify any policy other than keeping rates low for a longer period of time (which itself could take some steam out of the Canadian dollar)," Mr. Tihanyi said in his daily foreign exchange update.
Scotia Capital currency strategists say that, while the loonie could break through parity before the end of this year, it is unlikely to sustain that level.
"We still view parity as too strong at this point, and [any move closer to parity is]likely to draw the Bank of Canada's ire to an even greater degree," Mr. Tihanyi said.