In what one economist described as “loonacy,” the Canadian dollar dove another cent in opening trading Thursday – hitting a four-year low of 78.48 cents (U.S.) at one point – before recovering to end the day nearly flat, at 79.64 on news that the federal government will temporarily guarantee inter-bank borrowing.
The loonie's morning dip came on the heels of a fall of 2.69 cents Wednesday – wiping out more than half of the ground that was gained “during the bull run between 2002 and 2007,” Steve Malyon, a currency strategist with the Bank of Nova Scotia, said in an interview. The dollar closed Wednesday at 79.70 cents.
“Proving yet again that the Canadian dollar has never met a global financial crisis it didn't want to join, the loonie has plunged into its most intense tailspin on record in the past month,” said Bank of Montreal economist Douglas Porter in coining the “loonacy” description.
The currency was down about 24 per cent year-over-year early Thursday and down almost 7 per cent from the end of last week – brought down by weakening commodity prices and the rising value of the U.S. dollar relative to other currencies.
Bank of Canada Governor Mark Carney said at a news conference in Ottawa Thursday that the central bank is “watching developments in the foreign exchange market very closely.
“There has been extreme volatility …in foreign exchange markets for all currencies, it's not unique for the Canadian dollar.”
In its monetary policy report Thursday, the Bank of Canada said its projection through to the end of 2010 assumes that the Canadian dollar will average 85 cents, and that this could benefit Canadian manufacturers who ship to export markets.
“The recent depreciation of the Canadian dollar will provide an important offset to the effects of weaker global demand and lower commodity prices,” Mr. Carney said after releasing a report projecting that the Canadian economy will shrink at a 0.4 per cent annual pace in the fourth quarter of this year and show zero growth in the first quarter of next year before picking up steam.
The Canadian Imperial Bank of Commerce noted that the U.S. dollar continues to dominate the market “as a safe haven” in light of the volatility of stock markets around the world. This has depreciated other currencies to the extent that the governments of Mexico and Brazil took measures Thursday to prop up their currencies.
However, Chicago-based currency strategist Andrew Busch suggested Thursday that the U.S. dollar's rally against other currencies might be losing momentum.
“With New Zealand cutting rates 100 basis points and Canada providing a backstop for their banks, the greenback is giving back gains after a wild opening to currency markets,” Mr. Busch of the Bank of Montreal said in a note to clients.
“The strong buck is overdone for now and we should see a U.S. dollar selloff as stocks stabilize.” Mr. Busch wrote.
Like other currencies, the loonie has been sinking as the U.S. dollar has gained in the midst of spreading concerns about the credit crisis and the potential depth of a recession.
“The Canadian dollar is clearly being caught in the vortex that is sucking in almost everything that isn't bolted down,” Mr. Porter said.
A number of economists agreed with Mr. Carney that a lower currency can boost the country's economic fortunes by spurring exports.
But the currency advantage is not much benefit to Canadian producers if export markets dry up, Mr. Malyon said in an interview.
“We're a major exporter of motor vehicles, parts and forest products, and when I look at U.S. vehicle sales and I look at U.S. housing, it is difficult to be too optimistic,” Mr. Malyon said.
He said he believes that concerns about the global credit crunch are easing somewhat, and that the Canadian dollar is dropping as attention turns to “the fundamentals – and these are very grim on a global scale, and we're seeing that reflected in commodity prices.”
The price of oil has fallen from $147 a barrel in July to less than $69 on Thursday. The decline has caused major oil companies to rethink their exploration and development plans in Canada. On Thursday, oil patch giant Suncor Energy Inc. reported that it has slashed its 2009 capital spending budget by one-third to $6-billion (Canadian).
“That's a concern as well,” Mr. Malyon said. “We're close to sort of the break-even level that makes new oil sands investments uneconomic, so that's a concern in terms of business investments in the next several quarters.”
Mr. Porter said Canadian consumers stand the most to lose from the abrupt drop in the value of the Canadian dollar over the past month.
“The loonie-related price discounts on a wide variety of consumer items will now be a thing of the past, and some items may actually see price increases,” Mr. Porter said.