As the loon flies
A study by BMO Nesbitt Burns today marks the 10-year anniversary of the beginning of the Canadian dollar's return to grace from its 62-cent lows, and the impact associated with the rise.
Over the same period, notes deputy chief economist Douglas Porter, almost 500,000 manufacturing jobs have been lost, offset by increases in the nation's resource industries. Canada's current account balance has tipped into deficit and its trade balance has eroded dramatically. And for investors, this "tectonic currency shift has caused an earthquake for relative returns."
Going forward, Mr. Porter and others project the loonie ()will remain strong as the factors buoying the currency persist. Among them are the weakening of the U.S. dollar, strong commodities prices and Canada's fiscal standing.
"It was 10 years ago this quarter that the Canadian dollar finally awoke from a multi-decade period of weakness to find itself at a record low of less than 62 cents (U.S.)," Mr. Porter writes.
"It then proceeded to rocket ahead by more than 70 per cent in less than six years, before wobbling heavily in the ensuing financial crisis and then finally settling back around parity (neatly up 62 per cent from the 62-cent low).
Here's what happened over those 10 years:
Employment in manufacturing plunged 22 per cent, a cost of almost 500,000 jobs. More than half of them came before the recession, and none of the positions lost to the slump have come back. Having said that, he added in an interview, the U.S. also suffered factory losses so more was at play. Still, it had a big impact.
The manufacturing job losses have been "largely mirrored" by a strong showing in resources, though those industries are just about 20 per cent of the size of the factory sector.
Canada's "previously robust" current account surplus, the broadest measure of trade, has plunged to a deficit, reported by Statistics Canada today at $48.3-billion for 2011, given the dollar's lofty levels along with a drop in U.S. spending.
Merchandise trade has come back, but the surplus "remains a show of itself from 10 years ago." And, he added, "perhaps the most telling statistic in the sea of data ... is the $32-billion swing in auto trade over the 10-year period, from a surplus of around 2 per cent of GDP in 2001 to a deficit of 0.7 per cent last year." That wasn't all the fault of the dollar, but it certainly played a role.
Investors in Toronto-listed stocks were doing better than those in the S&P 500 even without factoring in the dollar, largely on the surge in commodities. "However, when adjusted to common currency terms, the relative return gap swells tremendously, with holdings in foreign markets shredded by the loonie's surge."
Troubles in manufacturing, notably in auto making, at least partly show why productivity is poor in Canada, Mr. Porter adds. And it's not likely to change any time soon.
"While it is true on a micro level that individual firms can indeed afford to invest more, that doesn’t necessarily translate to the macro level for the broader economy - not when some high-productivity sectors are struggling to survive, or even shutting down," he says.
"Looking at the historical record, periods of Canadian dollar strength have been associated with some of the weakest productivity gains, while the strongest increases have come during periods of loonie weakness."
A separate study this week by CIBC World Markets economists Avery Shenfeld and Warren Lovely also found that while factory output has rebounded from the recession, its outlook for growth is dim because of the "structural hit" from the loonie.
"The crux of the issue is that the climb in the Canadian dollar has pushed goods sector wages (and other local costs) well above those stateside in common currency terms," they say.
"As a result, Canada is no longer a cost-effective location for a host of non-resource-related manufacturing activities. Initially, shutdowns were seen in sectors like apparel and furniture that had earlier hung on in part due to an undervalued exchange rate. More recently, Canada has lagged in attracting or retaining facilities for autos and parts, rail cars, steel mills, and other goods where the competition is now more weighted to U.S. producers."
Mr. Shenfeld and Mr. Lovely also note the shift in power caused by both the dollar and high resource prices.
Alberta, Saskatchewan and Newfoundland and Labrador benefit, while Ontario and Quebec lag.
"Notwithstanding recent gains in manufacturing, plants will continue to be lost to international competitors," they say.
"And within Canada, labour will continue to seek out brighter opportunities in the West. As economic, fiscal and political power consolidates in Western Canada, regional income inequality will soar and inter-provincial tensions will rise. Canada’s monetary authorities can avoid accelerating that process by keeping rates on hold for longer, but even a sidelined Bank of Canada won’t prevent a further hollowing out of Canada’s manufacturing heartland."
Just yesterday, Scotia Capital currency strategists Camilla Sutton and Eric Theoret forecast that the Canadian dollar would end this year at $1.02, pumped by several factors.
"On the global front we anticipate strong emerging market growth, with a soft landing expected in China, which should support growth sensitive currencies like the [Canadian dollar]," they said, citing other factors as well.
"Periods of risk aversion will continue to drive short-term drops in [the Canadian dollar], and downside risks to the global financial system remain below the surface despite central bank action; however, the potential for significant downward movement is limited and the longer-term trend remains bullish [Canadian dollar].
Original Article
Source: Globe
Author: Michael Babad
A study by BMO Nesbitt Burns today marks the 10-year anniversary of the beginning of the Canadian dollar's return to grace from its 62-cent lows, and the impact associated with the rise.
Over the same period, notes deputy chief economist Douglas Porter, almost 500,000 manufacturing jobs have been lost, offset by increases in the nation's resource industries. Canada's current account balance has tipped into deficit and its trade balance has eroded dramatically. And for investors, this "tectonic currency shift has caused an earthquake for relative returns."
Going forward, Mr. Porter and others project the loonie ()will remain strong as the factors buoying the currency persist. Among them are the weakening of the U.S. dollar, strong commodities prices and Canada's fiscal standing.
"It was 10 years ago this quarter that the Canadian dollar finally awoke from a multi-decade period of weakness to find itself at a record low of less than 62 cents (U.S.)," Mr. Porter writes.
"It then proceeded to rocket ahead by more than 70 per cent in less than six years, before wobbling heavily in the ensuing financial crisis and then finally settling back around parity (neatly up 62 per cent from the 62-cent low).
Here's what happened over those 10 years:
Employment in manufacturing plunged 22 per cent, a cost of almost 500,000 jobs. More than half of them came before the recession, and none of the positions lost to the slump have come back. Having said that, he added in an interview, the U.S. also suffered factory losses so more was at play. Still, it had a big impact.
The manufacturing job losses have been "largely mirrored" by a strong showing in resources, though those industries are just about 20 per cent of the size of the factory sector.
Canada's "previously robust" current account surplus, the broadest measure of trade, has plunged to a deficit, reported by Statistics Canada today at $48.3-billion for 2011, given the dollar's lofty levels along with a drop in U.S. spending.
Merchandise trade has come back, but the surplus "remains a show of itself from 10 years ago." And, he added, "perhaps the most telling statistic in the sea of data ... is the $32-billion swing in auto trade over the 10-year period, from a surplus of around 2 per cent of GDP in 2001 to a deficit of 0.7 per cent last year." That wasn't all the fault of the dollar, but it certainly played a role.
Investors in Toronto-listed stocks were doing better than those in the S&P 500 even without factoring in the dollar, largely on the surge in commodities. "However, when adjusted to common currency terms, the relative return gap swells tremendously, with holdings in foreign markets shredded by the loonie's surge."
Troubles in manufacturing, notably in auto making, at least partly show why productivity is poor in Canada, Mr. Porter adds. And it's not likely to change any time soon.
"While it is true on a micro level that individual firms can indeed afford to invest more, that doesn’t necessarily translate to the macro level for the broader economy - not when some high-productivity sectors are struggling to survive, or even shutting down," he says.
"Looking at the historical record, periods of Canadian dollar strength have been associated with some of the weakest productivity gains, while the strongest increases have come during periods of loonie weakness."
A separate study this week by CIBC World Markets economists Avery Shenfeld and Warren Lovely also found that while factory output has rebounded from the recession, its outlook for growth is dim because of the "structural hit" from the loonie.
"The crux of the issue is that the climb in the Canadian dollar has pushed goods sector wages (and other local costs) well above those stateside in common currency terms," they say.
"As a result, Canada is no longer a cost-effective location for a host of non-resource-related manufacturing activities. Initially, shutdowns were seen in sectors like apparel and furniture that had earlier hung on in part due to an undervalued exchange rate. More recently, Canada has lagged in attracting or retaining facilities for autos and parts, rail cars, steel mills, and other goods where the competition is now more weighted to U.S. producers."
Mr. Shenfeld and Mr. Lovely also note the shift in power caused by both the dollar and high resource prices.
Alberta, Saskatchewan and Newfoundland and Labrador benefit, while Ontario and Quebec lag.
"Notwithstanding recent gains in manufacturing, plants will continue to be lost to international competitors," they say.
"And within Canada, labour will continue to seek out brighter opportunities in the West. As economic, fiscal and political power consolidates in Western Canada, regional income inequality will soar and inter-provincial tensions will rise. Canada’s monetary authorities can avoid accelerating that process by keeping rates on hold for longer, but even a sidelined Bank of Canada won’t prevent a further hollowing out of Canada’s manufacturing heartland."
Just yesterday, Scotia Capital currency strategists Camilla Sutton and Eric Theoret forecast that the Canadian dollar would end this year at $1.02, pumped by several factors.
"On the global front we anticipate strong emerging market growth, with a soft landing expected in China, which should support growth sensitive currencies like the [Canadian dollar]," they said, citing other factors as well.
"Periods of risk aversion will continue to drive short-term drops in [the Canadian dollar], and downside risks to the global financial system remain below the surface despite central bank action; however, the potential for significant downward movement is limited and the longer-term trend remains bullish [Canadian dollar].
Original Article
Source: Globe
Author: Michael Babad
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