Loonie Gets U.S. Flu Missing Out on Commodity Gains: Currencies

Canada’s dollar is missing out on the world-beating gains of its commodity-linked peers amid shrinking demand from the U.S., its biggest export market.

The loonie has tumbled 4.2 percent this year against a basket of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes, the worst performance in the group. Canada’s currency is struggling even as the dollars of Australia, an iron-ore producer, and New Zealand, which relies on dairy exports, lead the pack with gains of 3.6 percent.

While its Antipodean counterparts enjoy a wider range of offshore markets, Canada exports 75 percent of its goods to the U.S., where the worst winter storms in a generation curbed demand. That has left Bank of Canada policy makers contemplating an interest-rate cut that may weigh further on the currency to kick-start an economy that was shrinking as recently as the fourth quarter.

“When the U.S. catches a cold, Canada gets the flu,” Camilla Sutton, the chief currency strategist at the Bank of Nova Scotia in Toronto, said in an April 23 phone interview. “What Australia and New Zealand have is, if one of their export economies is not as strong, then they have the other economies to pick up the difference.”

Drop Extended

Canada’s dollar has fallen 3.1 percent against its U.S. counterpart this year, extending a 6.6 percent drop from 2013 that was the sharpest since the depths of the global financial crisis. The loonie, named for the image of the aquatic bird on the C$1 coin, reached a more than 4 1/2-year low of C$1.1279 on March 20 and was at C$1.0962 as of 12:02 p.m. in New York.

The Canadian currency will weaken 3.1 percent to C$1.13 by year-end, according to the median estimate of more than 40 strategists surveyed by Bloomberg. New Zealand’s dollar, known as the kiwi, will fall 2.9 percent to 83 U.S. cents, while the Aussie will drop 5 percent to 88 cents, separate surveys suggest.

The currencies of New Zealand and Australia are the second-and third-best performers versus the U.S. dollar among 16 major peers tracked by Bloomberg this year, while the loonie suffered the biggest loss. Norway, which is reliant on oil exports, saw its krone jump 1.3 percent.

Shrinking Share

Canada’s share of U.S. non-energy imports fell to 11.4 percent last year from more than 17 percent in 2000, the central bank said in an April 24 report. Some industries, such as textiles, clothing and motor-vehicle parts, face such severe structural declines because of foreign competition that they’re unlikely to see much benefit from a weaker exchange rate, according to the report.

Bank of Canada Governor Stephen Poloz said in an April 16 news conference that he won’t rule out rate cuts to stimulate the economy after leaving its benchmark at 1 percent.

In its monetary policy statement, the bank cut growth forecasts to 2.3 percent this year, down from a January forecast of 2.5 percent, and said the economic recovery “hinges critically” on a shift to exports and investment.

The U.S. economy expanded 1.2 percent in the first quarter, according to the median estimate of more than 80 economists in a Bloomberg survey, down from 2.6 percent growth in the prior three months.

Relative Value

Even as the U.S. recovers, Canada may not benefit as much in the past because its currency is still too strong, pushing up labor costs, according to Steven Englander, the managing director and global head of Group of 10 foreign-exchange strategy at Citigroup Inc. in New York.

“The real issue is, would anyone prefer to put an auto plant in Ontario versus Mexico or the U.S.?” Englander, whose bank is the world’s second-biggest currency trader, said in an April 17 phone interview. “Canada just isn’t competitive.”

Even after its declines, Canada’s dollar is 11 percent overvalued versus the greenback, according to an Organization for Economic Co-operation & Development measure of purchasing-power parity. The kiwi and Aussie are even more overvalued, at 20 percent and 27 percent.

Ontario, the center of Canada’s auto industry, saw manufacturing shrink to 23 percent of its economy last year, from 31 percent a decade earlier, according to a report this month by the provincial government. The region’s share of exports to the U.S. fell to 5.5 percent, from 8.7 percent.

Pipeline Shortage

The BOC added language to its January policy report saying an excessively strong currency was a hurdle to non-manufacturing exports. Canada’s gross domestic product probably expanded 0.2 percent in February, after growing 0.5 percent the previous month and shrinking by that amount in December, economists surveyed by Bloomberg said before an official report tomorrow.

Even the energy sector, Canada’s biggest export industry, may face risks, according to Evan Brown, a currency strategist at Morgan Stanley.

Pipelines including TransCanada Corp.’s Keystone XL are mired in regulatory hearings because of opposition from environmentalists, while energy companies face increasing competition from the U.S. A lack of pipeline infrastructure for bringing Canadian crude to international markets has led to a discount of $18.60 per barrel on its products compared with the North American benchmark. The discount was as high as $42 in November, according to data compiled by Bloomberg.

Antipodean Gains

“Canada has to lean on something for growth and that something is going to be what they have relied upon” in the past, “which is commodity exports,” Brown said in an April 23 phone interview from New York. “If the oil-export receipts -- the income from oil exports -- is disappointing, that’s where you get the most bearish scenario for Canada.”

The loonie could fall as low as C$1.30 per U.S. dollar as soon as next year under a “worst-case scenario” where the pipeline problems remain unresolved and consumer demand and manufacturing drops off, Brown predicted.

Many of the things going wrong for Canada seem to be working in Australia and New Zealand’s favor, with exports remaining robust and domestic demand showing signs of a revival.

New Zealand’s dollar has benefited from a central bank that this year became the first in the developed world to raise interest rates since 2011, while an economic revival is boosting its currency. Both nations count China as their largest export market, and speculation that policy makers will take emergency steps to stimulate the struggling Asian economy are helping their currencies.

“The Australian dollar has rebounded on the squeeze of the bearish proxy-trade for China,” Sebastien Galy, a senior currency strategist at Societe Generale SA, said in an April 23 phone interview from New York. The French lender sees the loonie falling more than 4 percent to C$1.15 by year-end.

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