The Canadian dollar's heyday is basically over

During the the heady years of 2011 and 2012, Canucks could swagger through the U.S. with open wallets, confident that our jacked-up petrocurrency was holding its own against the U.S. dollar.

Why spend money in high-tax Canada, when a Canadian dollar was worth as much as a greenback? At one point in July 2011, one loonie was worth more than 1.06 U.S. dollars.

Barring any major economic surprises, though, those days won’t be coming back anytime soon. Factors ranging from the election of Donald Trump to global commodity prices to the machinations of the U.S. Federal Reserve suggest the loonie will stay weak against the U.S. dollar in the near future.

At its low point this year, January 20, the Canadian dollar was worth only 68.2 American pennies. It closed at 74 U.S. cents as of this Monday.

Blame the central banks

If you need to blame a single scapegoat for the weak Canadian dollar, look to central bank policy. The U.S. Federal Reserve, the world’s most powerful central bank, is expected to raise interest rates in the near future, perhaps as early as December 14. That comes after years of keeping interest rates near record lows in an attempt to juice the economy.

Foreign exchange markets trade on presumptions about the future, and just the anticipation of higher interest rates has already made the U.S. dollar more valuable — and the Canadian dollar correspondingly weaker.

At the same time, the Bank of Canada is unlikely to raise its extremely low interest rates until later in 2016, or even 2017 — and could even cut rates before raising them. That would make the Canadian dollar even less valuable against the U.S. dollar.

The Trump factor

“Whether Trump makes America great again or not is no sure thing, but the market is giving him the benefit of the doubt,” said currency analyst Adam Button of ForexLive.com.

The president-elect has signaled plans to spend bigly. Building a border wall with Mexico, deporting millions of people, and fixing America’s “Third World” airports all cost money, boosting the U.S. dollar at the loonie’s expense.

As far as currency traders are concerned, the Canadian dollar can expect no such boost from government spending.

“Canada has already blown its fiscal wad” with Trudeau’s infrastructure plan, said Button, “but for America it’s new information.” Button sees the loonie getting “very close to 70 cents” in the next six months.

‘Collateral damage’ to the loonie

Other Trumpian possibilities, like the specter of renegotiating NAFTA, are weighing on the Canadian dollar as well.

At the same time, the U.S. dollar is gaining from the possibility that Trump will cut corporate taxes and entice American corporations to repatriate hoards of money stashed abroad, buying lots of U.S. currency in the process.

“The Canadian dollar is just collateral damage,” said Karl Schamotta, director of market strategy with Cambridge Global Payments, who expects the loonie to trade between 71 and 77 cents over the next six to twelve months.

A crude surprise?

Like anyone who tries to divine the financial future, analysts like Button and Schamotta could be wrong. An economic surprise, like a big, sustained increase in the price of oil could liven up the loonie once again.

Of course, the value of the Canadian dollar might not have nosedived as much as it did if the Canadian economy hadn’t been so reliant on currency-inflating oil exports in the first place.

“Over the last decade, an overvalued Canadian dollar hollowed out the entire Canadian export center,” explained Schamotta.

In other words, as high oil and commodity prices pushed the Canadian dollar to new heights, goods made by Canada’s manufacturing sector became more expensive and less attractive to foreign buyers — an economic dilemma commonly known as “Dutch disease.”

The hangover

In theory, today’s lower loonie should boost exports and breathe new life into Canadian manufacturing. But the manufacturing sector, weakened by Dutch disease, isn’t in a great position to take advantage of the shift in exchange rates.

“We’re definitely suffering the hangover” of the loonie’s petroleum-lubricated glory years, said Schamotta.

That takes us right back to the Bank of Canada’s policy of keeping interest rates — and, consequently, the Canadian dollar — low while the economy adjusts to the reality of cheap oil.

All told, the outlook for the Canadian dollar doesn’t offer much hope for Canadians hoping to afford a trip to the U.S. anytime soon.

Maybe we’d be better off just staying home and manufacturing goods for export.

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