The loonie’s value is a tough balancing act for Canada. On one hand, a weaker currency against the U.S. dollar makes exports cheaper, but a strong dollar will make imports more affordable for Canadians. (Credit: Peter J. Thompson/National Post/Postmedia files)
The loonie broke through 72 cents U.S. late last week and continued to hold in trading on Monday, rising to a level last seen in November 2024.
“The idea of Canada as a safe haven … is a bit of a stretch because we’re so exposed to the United States,” William Robson, president and chief executive of the C.D. Howe Institute, said. “But to some extent, somebody who’s selling United States bonds might say, ‘OK, well, maybe I’ll take a bit of a hit on the yield and buy some Canadian debt as well because they look like better creditors.’”
Karl Schamotta, chief market strategist at Corpay Currency, said a broad-based reappraisal of the U.S. economy’s exceptional status is underway and global market participants are now in a race to find alternatives.
“Canada, Europe, and Japan all stand to benefit as investment flows become more diversified,” he said in an email.
The haven argument holds some water for Michael Davenport, a senior economist at Capital Economics Ltd., but he said the loonie is also gaining on the falling chances that the Bank of Canada will cut interest rates on Wednesday. The central bank’s overnight lending rate currently stands at 2.75 per cent.
Chances of a rate cut this week stand at 33 per cent, down from 55 per cent last Monday, according to Bloomberg.
“Markets are starting to price in the higher likelihood of a pause by the Bank of Canada and taking out expectations of interest rate cuts this year,” Davenport said. “So, that is also at play in terms of driving the net appreciation of the dollar against the U.S. dollar.”
He said policymakers are keenly worried about landing in another inflation mess similar to the one following the pandemic.
The Canadian dollar’s current value is something of a change for the not-so-long-ago beleaguered currency.
From a low of 68.8 cents U.S. on Jan. 31 — which was less than the level reached during the pandemic — the Canadian dollar is up 4.9 per cent as it continues to recover from a plunge that began last September when polling indicated that Donald Trump’s prospects of taking the White House were increasing.
At that point, the Canadian dollar was trading around 74 cents U.S., but investors began flooding into the greenback on the belief that Trump would be good for the economy and markets with his low-tax and regulation-cutting policies.
Tariffs have upended that view, with the U.S. dollar index, which measures a basket of major currencies including the Canadian dollar, down 9.4 per cent since mid-January.
“The bigger picture is that North American currencies are down compared to the rest of the world,” Robson said. “The United States, in its position as the provider of the most secure debt securities, in its position as the provider of the currency that most of the world settles its transactions, these things were never really in question for decades and are now in question, and it’s very hard for investors to know where to go.”
The strengthening of the Canadian dollar has consequences. For example, a rising dollar is negative for Canadian oil producers since exports are priced in U.S. dollars, Nima Billou, assistant vice-president of energy, utilities and natural resources at Morningstar Inc., said.
“For producers, what happens is WTI (West Texas Intermediate) is priced in American (dollars) and then what they receive in the local Canadian benchmarks, once it’s translated over into Canadian dollars, as the Canadian dollar strengthens, they’re going to receive less,” he said in a report, adding that a one-cent rise — or decline — in the Canadian dollar represents a cash-flow gain or loss for Canadian producers of $1.5 billion.
In an earlier column in the Financial Post, when the loonie was trading much lower against the U.S. dollar, Robson said a weaker currency, which he described as ill-tasting “medicine,” would take some of the sting out of U.S. tariffs because Canadian goods would simply cost less when prices were converted into greenbacks.
But Davenport said the loonie’s value is a tough balancing act for Canada. On one hand, a weaker currency against the U.S. dollar makes exports cheaper, but a strong dollar will make imports more affordable for Canadians.
“Those increased imports from improved purchasing power … would weigh and drag on the Canadian economy,” he said. “It’s not necessarily going to benefit the overall level of GDP in the economy, whereas a weaker Canadian dollar will benefit exports, and that would provide a little bit of a cushion and a booster buffer to Canada’s economy.
However, the Canadian dollar is down 7.5 per cent against the euro and 7.4 per cent against the Japanese yen since mid-November.
“To some extent, there’s a bit of a silver lining in the cloud for Canada, which is that our exports are getting quite a bit more competitive against other markets,” Robson said.
He said that is a good thing, especially given that Canada is looking to diversify its trade to other markets in an effort to break its hefty reliance on the U.S.
In February, 80 per cent of Canada’s merchandise exports were sent to the U.S., with China coming a distant second, accounting for 3.8 per cent, while Japan was fourth at 1.7 per cent and Germany, France and Spain combined took in 1.5 per cent.
“Trade diversification is part of the answer for us,” Robson said. “But the lower Canadian dollar against other currencies in Europe and Asia and elsewhere in the world is actually part of the answer for us because we are going to badly want to export more to them if we’re having trouble exporting to the United States.”
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