Business·Analysis

Tumbling loonie one more reason to stay home and celebrate Canada 150: Don Pittis

Fear of a popped housing bubble, Trump's trade threats and falling oil are making foreign holidays and imports more expensive. But the weak loonie may not last.

In the weird world of currency markets, Trump's attacks on trade could make Canada's exports more competitive

The Canadian dollar that traded this week below 73 cents US was worth 77 cents in February. (Mark Blinch/Reuters)

Fickle global currency traders have suddenly turned on the Canadian dollar.

The attack is big enough to make ordinary Canadians take notice. Foreign holidays and imports were already feeling pricey, but a precipitous decline of nearly a nickel on every dollar could make people change travel and purchase plans.

As recently as February, that same global market was betting the loonie would rise as the currency flirted with 77 cents US.

On Tuesday, it traded down to 72.89 cents US, and on futures markets the majority of traders were taking a short position, betting the currency would fall further.

Unpredictable swings

Oversimplified news reports often ascribe swings in a currency to simple rational causes, but it is reasonable to be suspicious of the rationality of traders who pile on to bid the currency up one month and then pile on to bid it down two months later.

Global currency markets, with literally millions of players, defy simplistic logic.

Expert opinion varies widely, with strong views, such as the prediction the loonie would plunge to 59 cents US in 2016, getting disproportionate attention.

A fun piece this week by Financial Times columnist Martin Sandbu titled "Who Still Believes in Mr. Market?" reminds us how wrong market-based predictions can be, especially when it comes to foreseeing or interpreting political events.

"The right attitude to these puzzles may be to reconsider how much market price movements really do tell us — and retreat from any maximalist interpretation," writes Sandbu.

Keeping that in mind, we can examine three main reasons offered for the recent plunge in the loonie.

Plunging crude

One is the latest decline in the price of oil. As a petro-currency, the Canadian dollar is affected by the rise and fall in the world price of West Texas Intermediate, the benchmark grade of North American crude oil. 

After the market gave notice that WTI was heading for $60 US, people in the Canadian oil business got excited. So did the people who trade the Canadian dollar. But this week WTI fell to the $47 range, contributing to the loonie's about-face.

U.S. President Donald Trump's contradictory comments on trade and the renegotiation of NAFTA are also cited as reasons for the loonie's decline.

U.S. President Donald Trump's conflicting comments on trade have worried international currency traders, but a resulting fall in the loonie has only made Canadian goods cheaper in U.S. markets. (Carlos Barria/Reuters)

At first, the changeable president said Mexico and China were the trade cheats, and he reassured Prime Minister Justin Trudeau that any alterations in the trade deal with Canada would be mere "tweaks."

Suddenly all that changed, as the former reality TV star took to Twitter to badmouth Canada's energy, dairy and softwood industries while threatening to cancel the NAFTA trade deal. A duty of up to 24 per cent on Canadian lumber seemed to show that this time it was more than talk. 

The final factor that may have helped change the minds of global currency traders is Canada's own subprime mortgage troubles and the danger they could pop a bubble in parts of the country's housing market.

Feedback loop

Like many markets, and maybe more than some, currency trading is a gigantic feedback loop. The best reason for traders to sell a currency is if they think other traders are going to sell the currency in future.

That means news, whether strictly true or not, can have a disproportionate effect on trading.

For instance, this week, a series of stories in the international media played catch-up on the trouble at mortgage lender Home Capital. Even on occasions when the details were correct inside the story, sexy headlines served to influence traders who know little about the facts on the ground.

The headline "Canada's Subprime Lenders Collapse; Has the Bubble Popped?" on the widely read financial site Seeking Alpha could have prompted currency traders to reach for their "sell" buttons before bothering to research the differences between the Canadian subprime troubles and the U.S. crisis that brought down the world economy in 2008.

Trump's erratic comments obscure the fact that long-standing trade disputes over softwood lumber and dairy, despite their regional importance, are unlikely to have a material impact on the wider Canadian economy. Similarly, wiser heads in the U.S. government have discounted the likelihood of NAFTA being scrapped.

The other part of the weird currency feedback loop is that as Trump and others talk down the Canadian dollar, the effect is to make Canada's export economy stronger.

Canada's export bank, the EDC, expects export growth to double this year.

On balance, a low loonie means fewer holidays and shopping trips from Canada to the U.S.

The low loonie increases the Canadian value of energy exports priced in world markets. The same applies to other exports from minerals to manufactured goods, and even applies to softwood and dairy. 

Canadian tech companies that compete in world markets can afford to pay their workers more and the equivalent salary in Canada will buy more Canadian goods and services.

And that likely means a stronger economy will eventually push the loonie up again.

In the meantime, Canadians, already put off by Trump's border policy, may be tempted to stay home and celebrate 150 years of Confederation.

Travellers who might otherwise have summered in the U.S. will have one more reason to spend their dollars, pounds and euros north of the border.

Follow Don on Twitter @don_pittis

About the Author

Don Pittis

Business columnist

Don Pittis was a forest firefighter, and a ranger in Canada's High Arctic islands. After moving into journalism, he was principal business reporter for Radio Television Hong Kong before the handover to China. He has produced and reported for the CBC in Saskatchewan and Toronto and the BBC in London. He is currently senior producer at CBC's business unit.

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