Ladies and gentlemen, step right up and see the amazing flying dollar! It defies gravity! It leaps debt-riddled, flaccid currencies in a single bound! Okay, a series of little bounds, but the point is, it leaps! Higher and higher, see it soar! That'll be 75 cents, please, sir. No, wait — 76 — oops, hold on — 77 cents.
Yes, it's quite the freak show, watching the Canadian dollar's ascent against the U.S. dollar.
The currency's rapid rise (up more than 20 per cent since the start of the year) has certainly delivered a shock to the country's economy, not to mention the profits of exporters, and it has injected another element of uncertainty in trying to predict the health of the stocks of those companies. Indeed, a lot of market watchers are still bracing themselves for a dollar-driven drag on exports and profits, and hence on stock prices, to take hold. But when the short-term shocks wear off, the longer-term implications could actually be quite encouraging for Canadian stocks.
For the many people out there who only see a whole lot of trees blocking their view of the forest, this might be a bit tough to swallow. They've seen company after company report deep dents in their bottom lines as a direct result of the surging currency. They've read warnings from economists that the dollar's sharp gains represent a substantial drag on the growth of our export-driven economy. They may be aware of the rough rule of thumb that says every three-cent (U.S.) rise in the value of the Canadian dollar has the equivalent economy-slowing impact of a one-percentage-point rise in interest rates.
Yet is the Canadian economy acting as if it has increased interest rates by a whopping 4.5 percentage points since the beginning of the year, as the dollar's rise from 63 cents to 77 cents would imply? The economy has added 111,000 new jobs in the past two months. Canada's trade surplus widened to $5.6-billion (Canadian) in September, as exports surged 4.7 per cent and imports jumped 4.5 per cent. Manufacturing shipments, reported yesterday, surged 5.2 per cent in September. The numbers defy expectations that the dollar's gains should be strangling demand for exported Canadian manufactured goods and costing us jobs.
Perhaps, given the economic data, we should consider the possibility that there are actually good reasons for the Canadian dollar's rise. That maybe this year's gains have reflected a set of economic fundamentals that are favourable to the Canadian market and will attract money to our currency.
Certainly some of the dollar's rise can be attributed to a much-overdue capitulation of the U.S. strong-dollar policy, as well as the Bank of Canada's moves early this year to raise interest rates at a time when the rest of the world was still cutting. But the currency's gains have also been driven by an increasingly bullish outlook for the Canadian market.
The U.S. economy is showing every sign of a robust recovery, and it is lifting the rest of the world with it. If forecasts for 2004 are accurate, we're headed for an economic rebound next year encompassing every major economy in the world.
That scenario implies strong demand for all goods and services, especially from the United States and especially for commodities — both of which are very encouraging signals for the Canadian market. Demand for base metals, oil and gas, and forest products all look to rise amid the global economic expansion; this should, in turn, lift demand for Canadian dollars to buy these goods from Canada's natural resource producers. In fact, according to the latest commodity price report from Toronto-Dominion Bank, commodity prices have already risen about 9 per cent this year in U.S. dollar terms, softening the impact of the strong dollar for Canadian resource companies.
Meanwhile, the strong currency is making purchases of imported equipment much cheaper for Canadian firms, giving them much-needed incentive to make capital upgrades that will make them more competitive in the long run.
Bank of Canada Governor David Dodge has recently expressed confidence that the rising global economy will fuel demand for Canadian goods and offset the impact of the strong Canadian dollar. His confidence is being taken, in some quarters, as a signal that the central bank is unlikely to cut interest rates at its next scheduled rate-setting date next month to try to discourage demand in the Canadian currency. It is, instead, leaning toward allowing global demand for Canadian goods to catch up to the strong expectations that have already been priced into the dollar this year.
If you agree with Mr. Dodge, then you have to consider the surge in the dollar as a vote of confidence in strong economic growth to come for Canada. Once the dollar stabilizes, the benefits of this growth to Canadian companies should surpass the short-term pain they have paid in currency losses to get there.
© The Globe and Mail
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