It might be hard to believe, but the Canadian dollar was one of the world’s strongest currencies last year.
Against the euro, pound and yen, the Canadian dollar gained four to five percent in 2000.
It was only against the American dollar that the loonie looked anemic. But given the strong trading relationship between Canada and the United States, it is the loonie-to-greenback comparison that matters most.
In recent years, the American dollar has been a Gibraltar of strength, or perhaps more like a volcano, its value growing, fueled by a lava-hot economy.
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An outlook by economists at the Canadian Imperial Bank of Commerce notes it is capital flowing into American stock markets and companies that has strengthened the U.S. dollar.
Investors were trying to “buy into” the success story of the American economy. Also, relatively high U.S. interest rates encouraged outside investment.
But recent developments have bank economists forecasting a Canadian dollar climbing to 69-70 cents (US) by the end of 2001.
A liberal dose of cold water has splashed onto the U.S. economy. Falling high tech profits snuffed the stock markets’ fires.
Rising energy costs cut into manufacturers’ profits and consumers’ disposable incomes.
To rekindle the embers, the U.S. Federal Reserve Board has lowered interest rates by a full percentage point.
Most analysts think Canada’s economy will outpace the U.S. in 2001, thanks in part to federal and provincial tax cuts. The Bank of Canada agrees and has lowered interest rates by only one quarter of a percentage point this year.
This has made Canadian interest rates look more attractive relative to the U.S.
But the experts have wrongly forecast a strengthening loonie before.
This time they emphasize there are factors that will limit the loonie’s appreciation, again centred on capital flow.
One is that as the federal and provincial governments retire debt, foreign investors who held those bonds are not reinvesting in other Canadian bonds.
Also the increased foreign content limits for registered retirement savings plans have caused Canadians to shift more of their money into foreign holdings.
But the worst case scenario is that the U.S. economy goes into recession. They doubt this will happen, but if so, demand for Canadian commodities would crash and the Bank of Canada would have to lower interest rates faster.
In that case, the loonie could drop as low as 63 cents.
