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How the Canadian dollar's plunge will juice the economy

These are stories Report on Business is following Thursday, Jan. 16, 2014.

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Loonie's fortunes
The rapid plunge in the Canadian dollar may be troubling to some, but it promises to provide a badly-needed boost to the economy.

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Which is why Canadian policy makers are no doubt not wringing their hands.

The loonie, as the country's dollar coin is known, sank by almost 7 per cent last year, and is down a further 3 per cent so far this year, its decline largely driven by weak economic readings and the promise of a very easy-going Bank of Canada under governor Stephen Poloz.

According to a new report from Bank of Montreal today, a 10-per-cent drop in the currency could translate to a boost to gross domestic product of up to 1.5 percentage points over two years.

Obviously some are losing out from the dollar's slide, notably Canadians trying to enjoy a winter getaway in the American south.

"But there are also lots of winners," said BMO's chief economist, Douglas Porter.

"The beleaguered manufacturing and domestic tourism sectors will find the biggest relief from the weaker currency. Even some retailers will be breathing a tad easier, as the loud siren call of cross-border shopping fades for consumers with each tick down in the currency."

A lower loonie helps exporters selling their goods in the United States, and gives tourists visiting Canada and Americans doing business here more buying power.

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Viewed another way, a 10-per-cent fall is equivalent to a cut in interest rates of a full percentage point under an old way of measuring such things, noted David Rosenberg, the chief economist at Gluskin Sheff + Associates.

Glen Hodgson and Michael Burt of the Conference Board of Canada don't agree.

"The Conference Board's assessment is that the drop in the dollar, if sustained, would have a small net positive impact on economic growth in the short term," they said today in a commentary.

"Some exporters may (emphasis on 'may') benefit, but consumer prices are also likely to rise."

The drop "makes us all a bit poorer as consumers by increasing the prices for most of the things we import," they added.

Both Mr. Porter and Mr. Rosenberg pointed out that the Bank of Canada can't be anything but happy with the way things have gone, because the country needs a push by its exporters.

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Mr. Rosenberg goes a step further in his belief that the erosion in the currency has been engineered by Canada's finance officials and its central bank, which denies any such thing. This would come through comments and policy signals.

"I still think it pays to note that the move in the currency is not about commodity prices or a sudden loss of investor confidence," Mr. Rosenberg said.

"Not at all. It has been policy-driven and keep in mind that the 10-per-cent drop has already offered up considerable stimulus for the economy."

This is one of the reasons that markets will be watching so closely when the Bank of Canada releases its policy statement next week. There's suddenly heightened speculation that the central bank could signal a cut in its benchmark rate, though observers don't see that happening.

"The perception that the market has of Poloz wanting a weaker CAD means next week's statement could be the clear impetus everyone is hoping for to bring us through 1.100," said Stephen Gallo, BMO's European chief of foreign exchange strategy.

He was referring to the Canadian dollar by its symbol, and looking at it as the U.S. currency vs. the loonie. Viewed another way, that suggests the loonie sinking to 90.9 cents U.S.

And what he meant by "everyone" are the market players who would profit because they've been betting against the Canadian currency.

The loonie is pretty much flat this morning, having dipped briefly below 91 cents yesterday and then perking up to the 91.5-cent range.

Since its most recent high in September 2012, noted chief currency strategist Camilla Sutton of Bank of Nova Scotia, the loonie has now lost 12 per cent. Since its 2013 high last spring, it's down 9 per cent.

Bombardier delays C Series again
Bombardier Inc. has again delayed the entry of its crucial C Series jet.

The plane and train maker said today it is making "solid progress" on the new line, but after a review and initial flight last fall the first testing phase will need more time.

It now projects the C Series entry in the second half of next year, The Globe and Mail's Bertrand Marotte reports. A larger version will enter service about six months later.

"We are taking the required time to ensure a flawless entry-into-service," said the chief of the Canadian company's commercial aircraft unit.

"We are very pleased that no major design changes have been identified," he added in a statement, expressing confidence that "we will meet our performance targets."

This came today as Bombardier announced it won a $1.2-billion (U.S.) order for 16 C Series jets from a new airline in Saudi Arabia.

If all options are exercised by Al Qahtani Aviation Co., which operates SaudiGulf Airlines, the value of the deal rises to $1.99-billion, based on list prices.

Goldman profit sinks
Goldman Sachs Group Inc. posted a drop in fourth-quarter profit today, but still topped the estimates of analysts.

The Wall Street giant earned $2.3-billion (U.S.), or $4.60 a share, compared to $2.9-billion or $5.60 a year earlier.

"Our work in advancing our client franchise and in ensuring continued cost discipline has allowed us to provide solid returns even in a somewhat challenging environment," said chief executive officer Lloyd Blankfein.

"We believe that we are well positioned to generate solid returns as the economy continues to heal and provide considerable upside for our shareholders as conditions materially improve."

Citigroup profit below projections
Citigroup Inc., in turn, fell shy of estimates, though its fourth quarter profit surged to $2.7-billion (U.S.), or 85 cents a share, from $1.2-billion or 38 cents.

"Although we didn't finish the year as strongly as we would have liked, we made substantial progress toward our key priorities in 2013," said chief executive officer Michael Corbat.

U.S. consumer prices rise
The United States reversed a disinflationary trend in December, as consumer prices in urban areas rose at the fastest pace since July, our Washington correspondent Kevin Carmichael reports.

America's consumer price index increased 0.3 per cent last month from November, the biggest monthly increase since July, when the index advanced 0.5 per cent. Energy prices and shelter costs led the gain, the Labor Department said today.

On the year, the index was 1.5 per cent higher, pushing inflation to a level closer to the Federal Reserve's target of 2 per cent. It will take more than one month of data to persuade the Fed that the threat of disinflation has passed, however. The U.S. central bank also relies on another measure of inflation for a more accurate read on prices.

Saputo closer to Australian victory
One doesn't generally associate cheese with pitched takeover battles, but Saputo Inc. appears poised to win a big one.

The Canadian cheese maker has been in a struggle for control of Australia's Warrnambool Cheese and Butter Factory Holdings Co., which is bidding the equivalent of $460-million (U.S.).

As Reuters reports today, one of the stakeholders, Bega Cheese Ltd., announced it will sell its interests, which will bring Saputo close to majority at 45.2 per cent.

Brazil hikes rate
Brazil's central bank unveiled a "bold" hike in its benchmark interest rate, of half a percentage point rather than the quarter-point markets were expecting.

This, noted Société Générale, despite its sputtering economy.

"The decision may strengthen the central bank's inflation fighting credentials, but it does not preclude further BRL weakness in the short term," Société Générale said, referring to Brazil's currency, the real, by its symbol.

The central bank's key rate now stands at 10.5 per cent.

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About the Author
Report on Business News Editor

Michael Babad is a Report on Business editor and co-author of three business books. He has been with Report on Business for several years, and has also been a reporter and editor at The Toronto Star, The Financial Post and United Press International. His articles have appeared in major newspapers around the world. More


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