OTTAWA — The Canadian dollar continued to rise toward parity with its American counterpart on Tuesday, putting pressure on the Bank of Canada to match its words of caution with action.
The loonie has risen nearly three cents in the past week and was trading at about 97.20 cents US on Tuesday afternoon, although it had been even higher earlier.
While some forecasters had expected the loonie to rise to the level of the U.S. greenback by early next year, it now appears that that “could happen middle of next week,” said Derek Holt, vice-president of economics with Scotia Capital.
That is good news for consumers in Canada, who may see the prices of imported goods fall in what economists call a “back-door pay hike,” and for vacationers or retirees who spend their winter months in the warm states.
But Canada’s manufacturing and forestry sectors — already on its knees from the collapse of demand in the United States during the recession — could be devastated by the loonie’s continuing surge.
The Canadian Manufacturers and Exporters estimates a one per cent appreciation in the value of the loonie reduces sales by about $2 billion, equating to about 25,000 jobs.
A three-cent rise from 94.30 cents US, the Canadian dollar’s closing value on Oct. 6, would be an increase of nearly 3.2 percentage points.
Since mid-March, when the Toronto stock market began to recover, the loonie has gone from a low of 76.53 cents to the current level above 97 cents US, an appreciation of about 26 per cent.
The central bank has been attempting the temper the enthusiasm of markets for the loonie vis-a-vis the U.S. greenback since the spring, to only spotty and at best temporary success.
With the central bank scheduled to speak again at next week’s policy rate announcement, observers are expecting Bank of Canada governor Mark Carney to speak out again about his currency concerns.
Few expect him to directly intervene in the market by printing more Canadian dollars and buying up U.S. greenbacks in an effort to boost the U.S. currency.
“This is a freight train. There’s only so much the Bank of Canada can do,” said Douglas Porter, deputy chief economist with BMO Capital Markets.
But Avrim Lazar of the Forest Products Association of Canada said the time for the Bank of Canada to try and jawbone the currency down is nearing an end. Much stronger action needs to be taken, he said.
“This is not a penny mining stock we’re talking about. It’s our currency, the foundation of our economic growth,” Lazar said.
“I’m not going to tell (Bank of Canada governor) Mark Carney how to do his business, but we’re saying if you want to keep jobs in this country and you want to avoid destroying the recovery, he has to use the tools at his disposal.”
The trouble is that Canada is not alone. Since March 9, other so-called commodity plays have performed just as well, or as in the case of Australia, far better. The Aussie buck has risen about 58 per cent against the U.S. currency.
Market analysts say a number of factors are at play, including the fact that money that sought a safe haven in the world’s most liquid currency during the crisis this past winter is moving now that global growth appears to be resuming.
And the fundamentals favour Canada. Growth in China and other Asian countries is again leading to an increase in demand for commodities that Canada exports. As well, Canada is not as saddled with debt as the United States.
“Sentiment has turned very quickly, very negatively against the U.S. dollar. The market is very focused on the U.S. deficit and the plans for funding it... and the market is concerned about the general outlook for the U.S.,” said Camilla Sutton, a currency analyst for Scotiabank.
In the past week, the loonie got additional turbo boosts from the surprisingly strong jobs gain reported on Friday — a net gain of 31,000 jobs — and the Australian central bank’s decision to raise rates, leading to speculation the Bank of Canada would be among the next to move.
The loonie’s strength, however, makes that even more improbable, noted Porter, since raising rates before the U.S. Federal Reserve does will only add more fuel to the loonie’s boosters.