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business briefing

Three-quarters of a loonie

The Canadian dollar tumbled today to its lowest level since mid-2004, and by most accounts it won’t stop there.

“Weak global equity and commodity markets have been the triggers for the increase in risk aversion,” said George Davis of RBC Dominion Securities, noting the hits to commodity-based currencies like the loonie and the Australian and New Zealand dollars.

The loonied slipped to a low just under 74.5 cents (U.S.), and many analysts believe it has further to drop.

Shaun Osborne, Bank of Nova Scotia’s chief foreign exchange strategist, for example, projects it will hit about 73 cents by the end of this year.

There are other things at play, of course, such as the weak state of the Canadian economy and the fact that the Bank of Canada won’t raise interest rates for some time yet, coupled with the fact that its U.S. counterpart, the Federal Reserve, is headed toward a rate hike soon.

The Canadian dollar is now down about 20 per cent from last year’s heights, raising questions for consumers and businesses alike.

Here are some recent musings from analysts on where the loonie’s headed, and what it all might mean:

Toronto-Dominion Bank economist Dina Ignjatovic expects the currency to hit a floor of 73 cents early next year, helping to “cushion the blow” in Canada’s three oil-dependent provinces, which have been hammered by the collapse in crude prices. Other provinces should do better, notably those that depend on non-energy exports: “Canada’s export sector has finally started to gain steam – a trend that we expect to continue going forward, aided by the lower loonie and strengthening U.S. economy.”

BMO senior economist Sal Guatieri says snowbirds should stop “fretting” because the loonie’s slide is limited, depending on what happens with oil prices. Then there’s the flip side: “Tourism spending is up 2.6 per cent in the past year (after inflation), as more Canadians are staying home and more foreign tourists are paying a visit. For Canadians planning a trip to the southern states this winter, your trip will set you back an additional 13 per cent from last winter (as of Jan. 1), while a visit to the U.K. or Europe is also pricier.”

Canadian companies, of course, hedge their bets, and Avery Shenfeld, the chief economist at CIBC World Markets, notes that importers that hedged U.S. dollar needs over the past couple of years “are counting their blessings.” Should they do it again at current levels or wait for the Canadian dollar to perk up? “Our point forecast for what lies ahead don’t appear to cry out for hedging by U.S. dollar buyers ... That said, hedging strategies need to be based on the risks of what might happen, not just on a point forecast from one economic scenario. If the Canadian dollar were to make a major move in the next couple of years, it’s much more likely to be a weakening rather than a sharp appreciation.”

Michael Gregory, the deputy chief economist at BMO Nesbitt Burns, projects the Canadian dollar will average about 74 cents in December. But “presuming the absence of post-election policy uncertainty and more stable oil prices, we look for the loonie to stabilize and drift mildly stronger afterwards (C$1.275 by 2016-end).” Which would mean a currency of almost 78.5 cents.

David Madani of Capital Economics believes Canada is still suffering from a “mild case of the so-called Dutch disease,” when a strong resources sector drives up a currency, simply put. Many observers have rejected this. True, the loonie is well down and exports have picked up, according to the most recent measures, but Mr. Madani says manufacturing has struggled, and continues to do so even with the weaker currency. Investment dollars that went elsewhere aren’t coming back any time soon, if at all, he believes.

BMO senior economist Benjamin Reitzes says he’ll be watching for the next set of trade numbers, after two good monthly export readings, to see if the softer loonie and stronger U.S. economy will still be drivers: “The adjustment from commodity-led growth to export-led growth is under way, but it takes time to unfold.”

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India cuts key rate

India’s central bank has taken a page from the Bank of Canada, although in one step rather than two.

The Reserve Bank of India cut its rate by half a percentage point today, to 6.75 per cent, a move that was more than economists had expected.

“The RBI is now waiting on commercial banks to pass on the policy rate cuts to their lending rates,” said Shilan Shah of Capital Economics.

“But faced with rising levels of bad debt, banks appear reluctant to lend, and the sector as a whole is in need of significant capital injections,” he added in a research note.

“Until this happens, there is clearly a limit to which monetary easing will have an effect on bank lending.”

Commodities between rock and (really) hard place