On Friday, it was a copy of the Report on Business from Sept. 17. The lead story was about the collapse of insurance giant AIG (ancient history now) with a secondary item on tumbling oil prices ($91 U.S. a barrel then).
Flipping to the markets page, I found that the TSX had closed on Sept. 16 at what now seems like a lofty 12,227 (it finished on Friday at 9,294) while the Dow was at 11,059 (now 8,379). But the real shocker was the currency exchange table. On that day just five weeks ago, the loonie was trading at $0.9316. It took $1.0734 (Canadian) to buy one American greenback.
Since then, our dollar has looked more like a diving pelican than a high-flying loon. On Friday it lost another full cent against the greenback, ending the week at $0.7856 (U.S.). It now takes more than $1.27 (Canadian) to buy one U.S. buck. That represents a drop of 15.7 per cent in the value of our currency in slightly more than one month. Where next? At this rate, we'll be back to a $0.62 (U.S.) loonie before year-end!
That probably won't happen, of course. Currency movements often overshoot the mark before putting on the brakes and correcting. Remember, it was only a year ago that our dollar was at $1.10 and some economists were predicting it could go to $1.25 on the basis of momentum alone. No one pretended our loonie was actually worth that much. It had been driven far higher than its intrinsic value by speculators.
Now we see the flip side. The loonie should be worth a lot more than $0.78. Economists differ on exactly where it should settle but $0.85 is a popular figure. But the current momentum has carried it well below that and it is very possible it could fall even more before the brakes take hold. We've got a runaway train on our hands.
When our dollar was high, a lot of people worried: manufacturers, tourism officials, exporters, politicians, even the Bank of Canada. Now that it is plummeting, some of those folks feel a little better – after all, a cheaper loonie will make it easier to sell Christmas trees to the U.S. market! But now we have a new group of worriers: sports moguls, snowbirds, importers, retailers, and, oh yes, the Bank of Canada again. The central bankers sure have a lot on their minds these days!
Bank of Canada Governors rarely comment on the exchange rate but Mark Carney departed from protocol at a press conference on Thursday when he seemed to place some of the blame for the loonie's precipitous fall on currency traders. Some observers interpreted that as a veiled threat that the Bank might intervene to stabilize the situation but if that was the intention it seemed to have no effect as the slide continued on Friday.
At this point, no one can say with certainty how much farther our dollar will fall but some economists believe that we are close to the bottom of this cycle. In an article published on Friday by CIBC World Markets in their newsletter The Week Ahead, Avery Shenfeld suggests that, as things stand right now, central banks probably cannot do much to stem the currency distortions we are seeing.
"It’s not interest differentials that are driving the foreign exchange move," he writes in an article titled After the Dust Settles. "Instead, it’s a wave of 'forced' U.S. dollar and yen buying to cover short positions created by other asset price developments." European banks and hedge funds that have U.S. dollar liabilities that exceed their assets are among the primary players but some of the problem is made here in Canada, he suggests.
"Canadian fund managers that hedged their U.S. equity holdings with forwards to buy back the C$ now have too many such contracts, given the slide on Wall Street. They too have to cover by buying the US$ forward."
Once these forced repositionings are finished, which he believes could be soon, we should see a fast recovery in the loonie. "The last five or ten cents of decline might be reversed as fast as they came, with further gains in the latter half of next year as the global economy and commodities rebound," he concludes. "It may take longer to get back to parity if we start from 75 cents or worse, but a country blessed with scarce resources that the world will again be clambering for will, a couple of years from now, have a currency
that’s back on par with the greenback."
Even if parity is a long way off, my view is there is a better-than-even chance that the loonie will bounce back to the US$0.80 to US$0.85 by year-end. No guarantees, of course – not in these wild times. But personally, I'm going to hold off on buying any greenbacks for a while. I'll wait until they're on sale again.
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