BlackBerry Woes Underscore Canada’s Currency ChallengesAri Altstedter
Smartphone maker BlackBerry Ltd.’s slide from innovator to also-ran epitomizes the challenges facing the Canadian dollar as the North American country looks to exports to fuel growth.
“Now Canada buys more iPhones than it sells BlackBerries,” James Kwok, the London-based head of currency management at Amundi Asset Management, which oversees the equivalent of $1 trillion, said in a Jan. 7 phone interview. “A lot of structural changes have been happening in Canada over the last few years, which has made Canada’s trade balance structurally weaker.”
A report last week showing a trade deficit nine times wider than economists forecast started the Canadian currency’s plunge to a four-year low of C$1.0991 today, and left it poised for a sixth monthly decline against a basket of nine developed-nation peers, the longest slump since 2002. Kwok is betting that this slide is only the beginning, and hedge funds and other large speculators are amassing close to the most bets against the Canadian dollar in nine months.
Canada’s economy grew at the slowest pace last year since the recession, and has posted the longest streak of consecutive trade deficits in at least 25 years. The country has been forced to discount its largest export, crude oil, amid shipping bottlenecks, and BlackBerry became the latest manufacturer to cut operations.
“In the past, Canada benefited a lot from the U.S. economy because they are very close to each other -- a big part of exports from Canada are going to the U.S,” Kwok said in a phone interview. “This time is different. I think the recovery will be much slower unless the Canadian dollar goes much lower.”
The loonie, as the Canadian dollar is often called for the aquatic bird on the C$1 coin, reached the weakest level against its U.S. counterpart since September 2009 today. The currency’s 2.9 percent decline this year makes it the worst performer after South Africa’s rand and tenders pegged to the rand: the Lesotho loti, Swaziland lilangeni and Namibian dollar.
The Canadian dollar traded at C$1.0937 to the greenback at 12:53 p.m. in Toronto.
Against the greenback, the difference in the number of wagers by hedge funds and other large speculators on a decline in the Canadian dollar compared with those on a gain, known as net shorts, was 60,542 contracts as of Jan. 7, data from the Washington-based Commodity Futures Trading Commission show. The average over the past year is net shorts of 23,986.
The Bank of Canada is expecting exports to revive flagging growth, though Governor Stephen Poloz said in a Dec. 17 interview that he doesn’t “fully understand” why shipments haven’t been stronger.
Kwok’s bet that the loonie will continue to drop is based on Poloz’s assurances to keep interest rates low until the economy recovers, and the central bank’s assumption that exports will fuel the recovery. The only way for both those conditions to come about is for the currency to weaken, Kwok said.
The U.S. Federal Reserve will oblige, he said, as it lets interest rates rise by slowing monetary stimulus, drawing capital looking for higher returns back to the U.S.
Canada’s November trade deficit widened to C$940 million ($857 million), Statistics Canada in Ottawa said Jan. 7. The median forecast was for a C$100 million deficit, according to a Bloomberg survey.
The same month, Canada imported C$1.1 billion more communications equipment, including smartphones from rivals to BlackBerry, than it sold abroad -- double the deficit from six years earlier, according to Statistics Canada.
In 2012, Waterloo, Ontario-based BlackBerry lost the top spot for Canadian smartphone shipments to Cupertino, California-based Apple Inc.
BlackBerry’s stock has fallen more than 90 percent from its 2008 peak after losing smartphone market share for years to rivals led by Apple and Samsung Electronics Co. BlackBerry cut its workforce by about 30 percent last year.
Lisette Kwong, a spokeswoman for BlackBerry, declined to comment on the impact the falling currency will have on the company and the effect of its cuts on the broader economy.
UBS AG lowered its forecast for the loonie today, predicting a decline to C$1.12 in three months, compared with a previous estimate for the currency to reach C$1 at the end of the first quarter. The Canadian dollar has been “slow to benefit from U.S. recovery,” Gareth Berry, a Singapore-based strategist, said in a note.
The loonie could weaken to C$1.17 per U.S. dollar by the second half of this year and C$1.30 by the end of next year, according to Jack McIntyre, who helps manage $38 billion in bonds from Philadelphia for Brandywine Global Investment Management LLC., and is borrowing the currency to invest in higher-yielding assets.
McIntyre said the trading relationship with the U.S., which is the destination for about 75 percent of Canada’s exports, has changed due to the discount Canadian producers get on their oil, growing U.S. oil production and a shrunken manufacturing base. Whereas 1 percent of U.S. growth once meant 1.5 percent growth for Canada, that’s no longer the case, he said.
“Our models are still telling us the Canadian dollar is overvalued,” he said in a Jan. 14 phone interview.
A lack of pipeline infrastructure to reach international markets has resulted in a discount on Canada’s largest export, heavy crude oil, compared with U.S. benchmark prices. That discount sat at $18.50 per barrel yesterday, and reached a record $42.50 per barrel in December 2012. Canada pays international prices for the crude oil it imports, which amounted to C$1.5 billion flowing out of the country in November.
At the same time, U.S. imports of oil plummeted to the weakest in three years in November as advances in domestic extraction put the U.S. on track to become the world’s largest oil producer by 2015, reducing dependence on foreign producers.
Manufacturing output in Canada accounted for 10.5 percent of gross domestic product in October, down from 16 percent in August 2000, according to data compiled by Bloomberg.
The change has meant Canada had less exposure last year to the best U.S. auto sales since 2007, after a decade that saw the three largest U.S. automakers ship more production to Mexico and the southern U.S.
Even so, Kevin Williams, the president and managing director of General Motors Canada, said the loonie’s recent drop isn’t enough for his company to increase operations in Canada.
“A precipitous drop that is sustained over a reasonable amount of time would be something that you’d be adjusting to,” he said in a Jan. 13 phone interview from Detroit. “Fluctuations and drops of the magnitude we’ve seen thus far actually allow us to get a better assessment of what we think is happening, but you’re always careful not to overreact.”
The three largest U.S. auto companies’ output in Canada was 1.48 million vehicles in 2011, down 24 percent from 2002, according to DesRosiers Auto Consultants. Employment dropped 55 percent to 20,777 workers over the same period, according to the Canadian Autoworkers Union.
“There’s ongoing concern that some of the structural headwinds facing manufacturing will persist despite the cyclical rebound in U.S. demand,” Derek Burleton, the deputy chief economist at Toronto-Dominion Bank, said in a Jan. 14 phone interview. “We are more on the cautious side in terms of export rebound.”