Soaring loonie is the price of Canada's success

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by L. IAN MacDONALD
The Gazette, Sunday, March 21, 2010

The loonie is soaring toward parity with the greenback again. This time Bank of Canada Governor Mark Carney and Finance Minister Jim Flaherty are not trying to "talk down" our dollar.

Carney tried that twice last year, and the only effect was to knock some basis points off the dollar for a day or so before it resumed its climb.

Now, touching 99 cents last week, the loonie has all but achieved exchange-rate parity with the U.S. dollar. And this time there is eloquent silence from Carney and Flaherty, a tacit recognition that the market will settle the value of the Canadian dollar, and doesn't want intervention or comments from the central bank.

Privately, Flaherty acknowledges that the value of our dollar is the price of Canada's success. The Canadian dollar is a petro-currency, and closely tracks the price of oil. And oil, which bottomed at $34 a barrel at the depths of the recession a year ago, has recovered nicely, to $82 last week. It's no accident that the loonie has moved up from 85 cents a year ago to virtual parity today, and may well move above par as oil closes in on $100 a barrel.

It's no mystery - we have oil, we have gas, we have coal, and we have other resources the world needs and wants. Canada is the new Saudi Arabia, right on America's doorstep, and when Americans talk about ending their dependence on foreign oil, they don't mean oil from Canada.

A big part of the price of success is Canada's fiscal framework. We went into and came out of the recession in the best shape of any G7 country. For example, the current deficit of $53 billion is only 3.5 per cent of GDP, compared with the U.S. deficit, $1.6 trillion, which is 11 per cent of national output. Britain is in even worse shape, with a deficit-to-GDP ratio of 13 per cent. Canada is supposedly on track to achieve virtual balance to the budget by 2015, when the forecast deficit of $1.8 billion will be only one-tenth of one per cent of GDP, which in those terms is just a rounding error.

When Policy Options magazine asked Flaherty why he didn't just take the deficit all the way to zero in five years, he replied, "Well, that's not where the arithmetic took us." But it might yet. The consensus among 15 top economists outside the government, including those from the Big Six banks, is that Canada's economy will grow by a modest 2.6 per cent this year. But we already saw a blow-out number of five per cent in the fourth quarter of last year, and if the first quarter of 2010 is anything like that, the economy will grow at a faster-than-predicted pace for the year, generating more personal, corporate and consumption tax revenues, and reducing the deficit more quickly.

And while Ottawa is taking on about $165 billion of new debt, Canada's debt as a percentage of GDP, 31 per cent, is also the best - by far - of any G7 country. France's debt-to-output ratio is 73 per cent, Germany's is 76 per cent, Italy's 117 per cent, Japan's 115 per cent, Britain's 75 per cent. and the U.S.'s 67 per cent.

This is a result of Canada's decade-long virtuous cycle, from the time Ottawa balanced its books in 1997 through to 2008, when successive Liberal and Conservative governments paid down debt from 70 per cent to 25 per cent of GDP, from worst to first in the G7.

So Canada has what the world wants - oil - and a sound fiscal framework. A high-valued loonie is more than the price of success - it reflects the world's good opinion of us.

There's no doubt that exchange rate parity is not good for Canadian exports, especially to the U.S., where the recovery is weak and unemployment still hovers just below 10 per cent. The U.S. housing bubble has also weakened demand for new stock, so the exchange rate and weak demand pose two challenges for Canada's softwood lumber industry.

There's equally no doubt that a strong dollar will dampen in-bound tourism from the U.S. for major events such as the Montreal International Jazz Festival. The flip side of that is cheaper March breaks in Florida for Canadians.

A strong dollar also forces businesses to make productivity gains if they want to maintain profit margins, and one element of that is that new high-tech equipment is usually denominated in U.S. dollars.

Other than "talking down" the dollar, which hasn't worked for Carney in the past, he doesn't have much leverage. He can't lower interest rates any more than he already has. In fact, he's coming up on the June 30 expiration rate of his promise not to raise them, a fact which may only strengthen the dollar even further.

 
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