There is a sense of déjà vu to the Canadian dollar's heady rise as barrelling commodity prices evoke memories of the loonie's prerecession surge above parity with the U.S. greenback. But, unlike then, the currency's current bull run threatens to snuff out a nascent economic recovery.
The Bank of Canada issued a rare public comment on the level of the loonie Thursday, warning that if the dollar's "unprecedentedly rapid rise" continues, it could choke off recent signs of a return to economic growth. The declaration came as the central bank confirmed its key lending rate at its historic low of 0.25 per cent.
The loonie has gained about 12 per cent against the American buck in the past month, its fastest rise on record, and has climbed almost 20 per cent from its level in March. The sudden surge is adding to the misery felt by exporters in Canada's manufacturing sector that were already struggling to sell their wares into the recession-ravaged U.S. market. The dollar closed Wednesday at 91.17 cents (U.S.), up 0.95 cents on the day.
Barring central-bank intervention in currency markets to curb the loonie's rise - something that the bank has refrained from doing since the early 1990s - many analysts expect the dollar to approach parity by next year as oil prices resume their upward climb. U.S. investment bank Goldman Sachs predicted Thursday that the benchmark oil price would hit $95 a barrel by the end of 2010, compared to the current price of about $69 and the less than $40 oil fetched earlier this year.
The return to robust commodity prices raises anew the prospect of a Canadian economy running at two speeds, as Alberta's oil sands rev up while central Canada's manufacturing sector contracts further, generating regional tensions and a political quandary for Prime Minister Stephen Harper's Conservative government.
"It is clearly going to set off a firestorm of debate about the economic structure of Canada," said Richard Harris, an economics professor at Simon Fraser University and expert in international trade. "The country can clearly generate wealth through commodity exports. But you still have a huge manufacturing sector in the most populous parts of the country that could be viable at an 80-cent dollar but would not be viable at parity on a sustained basis."
Though there is currently broad consensus that the dollar is headed higher, the loonie has in fact been on a yo-yo ride during the past 18 months - characterized by some of its biggest swings on the books. There is no assurance that the volatility won't continue in coming years.
That leaves policy makers increasingly concerned about the longer-term economic impact of such large currency fluctuations on Canada's ability to attract new investment and promises to resuscitate an old debate about whether Canada should peg its dollar to the greenback.
"The exchange rate is generating such a high degree of uncertainty that capital is just not going to locate here," insisted Thomas Courchene, a professor at the Queen's University School of Policy Studies.
The currency's roller-coaster ride is creating a headache for firms such as Rick Jamieson's. The head of Guelph, Ont.-based ABS Friction, a maker of brake pads, Mr. Jamieson began the year budgeting that the Canadian dollar would trade at about 87 cents, or about 10 cents higher than where it stood at the end of 2008.
"We thought we were being conservative," Mr. Jamieson opined. "Business loves stability and we don't have any right now."
Ted Mallett, chief economist at the Canadian Federation of Independent Business, echoed that sentiment. "It's the [dollar's]rapid movement back and forth that hurts because businesses don't want to shoulder the risk and smaller firms don't have access to sophisticated currency hedging tools," he said.
Prof. Courchene advocates a fixed exchange rate policy similar to the one Canada adhered to during the 1960s. In 1962, Prime Minister John Diefenbaker's government pegged the currency to the U.S. dollar at a rate of 92.5 cents. When the Liberals under Lester Pearson returned to power the following year, they maintained the fixed rate until 1970.
"The Pearson era was fantastic and all that was done under a fixed currency," Prof. Courchene noted, adding that Canada experienced a manufacturing boom, particularly in the auto sector, allowing it to put in place a vast array of social policies including universal health care and the Canada Pension Plan.
The dollar's current level is particularly relevant in the context of $14.5-billion (Canadian) bailouts of General Motors and Chrysler by the federal and Ontario governments, since the loonie's rise will offset a large chunk of the cost reductions both car markers obtained from the Canadian Auto Workers union. That could influence future decisions about whether to maintain auto assembly plants on this side of the border.
The dollar's rise could be blunted, Prof. Courchene suggested, if Alberta followed Norway's example and invested its oil royalties entirely abroad. That would counter commodity price-driven increases in the dollar's value and insulate the rest of the domestic economy from the negative impact of a strong currency.
"But the rest of Canada can't tell Alberta what to do with its royalties," he added.
The CFIB's Mr. Mallett noted, however, that not all manufacturing businesses are hurt by a rising dollar, since the strong currency enables them to purchase imported equipment for less. And a buoyant loonie favours Canadian-based companies that buy firms abroad.
That is the case for CGI Inc., a Montreal-based information technology services company that has units in 16 countries including the United States and India.
"As a growth company with a build-and-buy strategy looking to acquire outside of Canada, a strong Canadian dollar makes for strong acquisition currency," CGI spokesman Lorne Gorber said. "It is nearly a prerequisite to building global champions in Canada."
With a report from Kevin Carmichael in Ottawa
Konrad Yakabuski