Going down

There is an old saying that, “Fools rush in where angels fear to tread.”
Nevertheless, this column will attempt to chart the course of the Canadian dollar over the longer term.
It should be recognized that John Maynard Keynes, perhaps the 20th century’s foremost economist, went bankrupt speculating in the foreign exchange market.
Last year, the Canadian currency experienced a spectacular climb, rising to a premium of $0.10 over its U.S. counterpart. The reasons: our economy primarily depends on the exports of commodities, and all of them were in the midst of a major upswing. In addition, our dollar’s value is measured relative to its counterpart south of the border. There, the stagnant or worse economy has led the American Federal Reserve to cut interest rates, making that currency less attractive to foreigners. A weak U.S. dollar entailed a relatively stronger currency here. That has been taking place over in the past several months. As well, the United States runs a huge deficit in its international trading account. Gradually, its creditor nations will be less willing to invest in the economy there. Also, they are inclined to shun financial assets denominated in a weak currency that lacks compensating interest rates.
Given the above, it is no surprise that the Canadian dollar strengthened last year. Yet, the Canadian currency tumbled from its peak over the past few months. What is the explanation for that? As the U.S. economy now is slowing down into at best a sluggish state, our economy is beginning to feel the effects of that. Copper, a vital ingredient in construction, by now has fallen by about one-third from its peak. Nearly half of our gross domestic product is derived from exports such as metals and minerals, to south of the border. As a consequence, the Canadian economy is just beginning to falter. Already the Bank of Canada has responded by cutting our interest rates. Foreign investors will be losing some enthusiasm about our currency, a trend that at the present time is underway.
Furthermore, the United States still is the “engine” of the world’s economy. A recession there triggered by a U.S. business contraction will be felt across the globe. Then commodity prices, everything from base metals and lumber, perhaps even oil, will be less in demand. Moreover, our manufacturing sector, primarily automobiles and trucks, will decline.
Among the leading industrialized nations, Canada specially has had outstanding success in balancing our federal government budgets and retiring some debt. That process is destined to go into reverse as our economy weakens, further taking off some of the shine in our currency.
History shows the pattern of the Canadian currency, with fluctuations between say, US$0.60 and parity with the U.S. greenback. Notwithstanding last year’s surge above parity, there is every reason to assume that the historical range will persist. At the present time the fundamentals cited above suggest that our dollar will go to the lower part of that range. However, it will be impossible to pinpoint the exact timing of that move.

Bruce Whitestone