G-10’s Worst Performer Boosts Canada Exports: Currencies

For Teck Resources Ltd. Chief Executive Donald Lindsay, every cent knocked off the value of the Canadian dollar is worth C$62 million ($57 million).

As Chinese economic growth slows, that’s been a rare bit of good news for the world’s second-largest seaborne exporter of coal used in steelmaking, which was forced to take a C$30 million writedown on its inventory in the first quarter as the commodity’s price plunged to its lowest level in six years.

“This is partially offset by the positive effect of a stronger U.S. dollar relative to the Canadian dollar,” Lindsay said in an April 22 conference call. “That has a favorable effect on our operating margins since our sales are denominated in U.S. dollars.”

Teck isn’t the only Canadian company benefiting from the currency’s tumble of almost 7 percent over the past year against developed-nation peers, the worst performance among the 10-member Bloomberg Correlation-Weighted Indexes. From energy producers to auto manufacturers, the weaker exchange rate has made exporters more competitive and pushed the nation’s benchmark stock gauge to the highest level since 2008.

“There’s wide swaths of the stock market that actually benefit from the currency’s depreciation,” David Rosenberg, Toronto-based chief economist at Gluskin Sheff & Associates Inc., said in a May 28 phone interview. “Earnings estimates are actually going up the most in the sectors of the economy that benefit from a weaker dollar.”

Above Parity

Canada’s dollar was above parity with its U.S. counterpart as recently as last year, driven by global capital flowing into the nation’s oil sands and its strong banking system after the 2008 credit crisis. That capital has been draining out since the Bank of Canada suggested interest-rate cuts to head off deflation were possible, and expressed the benefits of a lower exchange rate to companies.

The dilemma now for the central bank, which meets June 4, will be if the currency appreciates as the economy grows and inflation accelerates.

Forecasters expect the loonie, as the Canadian dollar is known for the image of the waterfowl on the C$1 coin, to continue to slide, weakening to C$1.12 versus the greenback by Sept. 30, from C$1.0898 at 12:07 p.m. Toronto time, and remaining until the end of the year, according to the median estimate in a Bloomberg survey of more than 40 economists and strategists.

Standard Chartered Plc downgraded its short-term outlook on the loonie to underweight from neutral last week and said “fair value” for the currency would be C$1.1350 per U.S. dollar as the Canadian economy lagged behind the U.S., keeping the Bank of Canada on hold until the end of next year.

Growth Signs

Other resource companies have seen the benefits of the weaker loonie, with Vancouver-based New Gold Inc., Montreal-based Osisko Mining Corp. and Calgary-based oil producer Canadian Natural Resources Ltd. all citing the exchange rate for reducing costs or boosting profit in the first quarter.

Evidence of growth is showing up in economic data, with Canadian factory sales rising to the highest in more than five years in March. Inflation reached the central bank’s 2 percent target for the first time in two years in April, as the weaker currency pushed up the cost of imported goods.

While Canada’s gross domestic product slumped in the first quarter amid harsh winter weather, the 1.2 percent annualized rate outpaced the U.S.’s 1 percent contraction in the period.

Canada’s dollar opened at C$1.0286 on Oct. 23 when Central bank Governor Stephen Poloz surprised investors by dropping language about the need for future interest-rate increases, citing slack in the economy, leading to speculation about possible rate cuts. The currency slid 0.9 percent that day and bottomed on March 20 at C$1.1279, the weakest point since 2009.

Rate Cuts

Poloz said on April 16 he wouldn’t rule out rate cuts to stimulate the economy after leaving the benchmark at 1 percent. Policy makers said the recovery hinges on a shift in demand from indebted consumers to exports and business investment, predicating an export rebound on rising U.S. orders and a weaker Canadian dollar.

Last year saw the smallest foreign inflow since 2008, and year-to-date investment of C$6.14 billion trails the C$9.55 billion total for the same period last year.

“Poloz has been wanting to talk the currency weaker to kick-start the economy,” Darcy Browne, managing director of currencies at Canadian Imperial Bank of Commerce’s capital markets unit, said by phone from Toronto May 30. “He can’t really talk hawkish if the currency is below C$1.08.”

Company Earnings

Equity analysts have pushed consensus forecasts for company earnings on the Standard & Poor’s/TSX Composite Index, the benchmark Canadian equity gauge to a two-year high after three straight months of upward revisions, according to data from Gluskin Sheff.

The earnings forecasts for energy-company have surged 40 percent this year, while those for the S&P/TSX Industrials Index are at the highest point in Gluskin Sheff data going back for four years.

The brighter prospects for Canadian firms have caught foreign investors’ attention, with C$2.99 billion of inflows into the country’s stock market in March, contributing to the S&P/TSX’s 7.6 percent gain this year. It touched 14,765.15 on May 2, the highest level since June 2008.

The recent inflows combined with faster inflation have pushed the Canadian dollar up during the past month, with its 1.1 percent gain versus the U.S. dollar the best performance among Group of 10 currencies.

Changing ‘Tune’

For Krishen Rangasamy, a senior economist at National Bank of Canada, signs of economic growth will make it increasingly difficult for the central bank to maintain the kind of stance that’s facilitated the currency’s decline.

“No matter what the Bank of Canada says, markets are starting to see the data and saying, you know what, the Bank of Canada will probably have to change its tune sooner or later,” he said in a May 29 phone interview from Montreal. “The economy is slowly improving in Canada.”

National Bank forecasts the loonie to close the year little changed at C$1.09.

Speculative bets against the loonie outnumbered those for the currency by 21,810 contracts on May 27, from 26,534 the previous week, according to data from the Washington-based Commodity Futures Trading Commission. Traders have been bearish on Canada’s currency since March 2013.

To Michael Craig, a fixed-income portfolio manager at Sprott Asset Management LP, the weaker loonie is too important to Canada’s recovery for the central bank to let the recent rally continue.

“The only way -- and the bank has been kind of clear about this -- is if we get the export sector going,” he said in a May 28 phone interview from Toronto. “And if you see a stronger Canadian dollar, it’s not going to help.”

(An earlier version of this story corrected a reference to the Canadian dollar’s gains to say in the past month instead of this month.)

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