Where the Loonie Will Land

Text transcript

Avery Shenfeld, chief economist at CIBC.

The Canadian dollar seems to be stuck in a trading range for the time being, but when we look at the underlying fundamentals, to us, it’s clear that if Canada is going to stay at somewhere close to full employment without another housing boom or a consumer spending boom, we’re going to need a weaker Canadian dollar over time to get there. A longer-term target, and this is something that we might not reach until 2021, would be for dollar Canada to be in the 140 range, or the Canadian dollar getting pretty close to 70 cents U.S.

The proof is in the pudding, as they say, and if we look at how Canada has been doing on trade, going all the way back for the last 14 years, the answer is not well at all. Our real export volumes have significantly trailed the U.S. over that period, having earlier essentially run on par with the U.S. from the early 1960s all the way up to the period 14 years ago. What’s happened since is that Canada has been losing export competitiveness, exporters have been reducing capacity in Canada relative to the U.S. and, with a few exceptions like oil, Canada has struggled to increase the volume of its exports to the rest of the world.

We managed not to notice that in the Canadian economy over the last few years because we got ourselves to full employment on the back of a housing boom and a debt-financed consumer spending boom, but now that we’ve used regulatory and interest-rate policy to calm those waters on the household side, I think the gaps in the Canadian economy are starting to show, and our inability to leverage up exports and the resulting trade and current account deficit are ultimately going to put some downward pressure on the Canadian dollar. And in order to make that happen, the Bank of Canada might also keep interest rates enough below those in the U.S. to encourage that gradual repositioning of the Canadian dollar.

It’s certainly not the outcome we’d prefer. We would prefer a productivity boom in Canada, a capital spending boom by business in Canada to take place in order to lever up exports, but it seems that the data are telling us that Canada is just not that cost-competitive at today’s exchange rate.