Canadian loonie dives to lowest level since 2004

- During 2015 the Canadian dollar — the Loonie — has lost 17 percent of its value against the U.S. dollar. Yesterday it closed below 72 cents U.S., the lowest value since the spring of 2004.

At the present exchange rate it will cost $1.40 Canadian to buy one U.S. dollar. With service fees it will cost about $1.43. Economist at the Bank of Montreal, Doug Porter, said:

 "The only bigger annual decline was in the extreme conditions of 2008, when the Canadian dollar fell 18.6 per cent — a threshold I thought would never even be approached again."We still have well over a week to go in 2015, so we could get closer to that level.

The decline in the loonie is in part the result of the steep slide in oil prices. Futures on Thursday were down 57 cents to $34.95 a barrel, the lowest price in seven years. Another factor is the recent raising of key interest rates by the U.S. Federal Reserve. In contrast, the Bank of Canada is keeping our interest rate at a lower level and may even lower the rate further in an attempt to stimulate the economy.

Some analysts predict that the loonie could go as low as 70 cents U.S. Canada is not alone in suffering a decline in the value of our currency, however. The U.S. dollar is climbing in value relative to major currencies. The loonie is actually holding up reasonably well compared to some other currencies. The Federal Reserve decision also helped push up the American dollar against the British pound, Japanese yen, Australian dollar and the euro.

Canadian Prime Minister Justin Trudeau said to reporters in Vancouver: "Obviously the economy of our largest trading partner picking up is a good thing, potentially, for Canada, but whenever there are shifts in the value [of the loonie], especially decreases, there are both challenges and opportunities."

Among the challenges will be higher costs for Canadian snowbirds who fly south to avoid the harsh Canadian winters. The costs in the U.S. will be considerably higher in terms of Canadian dollars. Perhaps, the snowbirds should travel further south to Mexico and beyond where the dollar may purchase more. Deputy Chief economist at TD Bank, Derek Burlton said: “Clearly there’s going to be some hurt in some of the traditional snowbird markets.” The bank predicts the loonie will drop to a low of about 71 cents but recover to about 80 cents in the next couple of years. This is still a long way from where it was not that long ago. Burton thought that snowbirds in areas such as economically depressed Alberta might stay closer to home. Others could cut their expenditures while in the US or cut the length of their stay. Many snowbirds, may be well enough off to simply continue on as before.

David Watt of the HSBC Bank of Canada along with others note that the weaker dollar will make out exports cheaper in terms of the U.S. dollar, a prime market for our export goods. However, the weaker dollar also is a symptom of weaker demand for our raw materials and oil both key exports. Watt said:“If you want to be an optimist, you lean on the one side that it will help boost exports.m I tend to lean more to the second side, that it reflects a degree of concern about the global economy.”

Optimists hope the growing U.S. economy and lower prices for Canadian goods will over time result in considerable growth in exports, helping the Canadian economy recover from its present relatively weak performance. The high U.S. dollar may encourage more Americans to visit and shop in Canada where items may now be less expensive than in the U.S.

Loonie takes a dive after Bank of Canada cuts interest rate

After Canada's central bank, the Bank of Canada, cut the bank rate from 1.0 percent to .75 percent, the Canadian dollar, the loonie, fell to its lowest level against the US dollar since 2011.

This morning, January 23, the loonie was still trading below 81 cents to the US dollar. The Bank of Canada rate cut caught markets by surprise as no economists had been predicting the drop at this time, although many were beginning to see a drop later in the year if economic growth remained sluggish. A statement from the bank said: “This decision is in response to the recent sharp drop in oil prices, which will be negative for growth and underlying inflation in Canada, The bank's policy action is intended to provide insurance against these risks, support the sectoral adjustment needed to strengthen investment and growth, and bring the Canadian economy back to full capacity and inflation to target within the projected horizon." The rate drop was made as both the bank and the IMF predicted lower growth in Canada in 2015. The sudden drop was no doubt part of the reason the loonie's value declined so quickly.

Many of Canada's exporting companies will benefit from the lowered value of the dollar. American companies buying from Canadian companies will find that their dollar buys more as the US dollar strengthens and the Canadian dollar is worth less. The lower loonie is a mixed blessing though as Canadian consumers will have to pay more for imported U.S. goods. The move to quantitative easing in the EU also drove down the value of the Euro. It would seem that there may be moves in many countries to cut the value of their currencies so as to improve their export positions.

 The U.S. dollar at the same time is remaining quite strong. This will be a great boon for U.S. consumers as imports will be cheap. U.S. exporters may find that there is less demand for some of their goods as they will be higher in price than those of foreign competitors. Sebastien Galy of Societe Generale said: "The Bank of Canada has taken the bull by the horn deciding to target a weaker CAD. It is a surprise so early but indicates the emphasis on adjusting the CAD for a very sharp reversal in its terms of trade gains since 2002 (oil)." While Greg Moore, of RBC Dominion Securities, did not think that the bank head, Stephen Poloz, deliberately attempted to weaken the loonie further, he admitted that Poloz did see a lower currency as an important part of the recovery. Galy expects that the loonie will reach 80 cents and perhaps even 78 cents.

Lower currency prices are not necessarily a boon for a country. The fall in value of the ruble is a disaster for Russia. While it makes exports cheaper, as the price of a main export oil tumbles and it faces economic sanctions, economic growth slows and costs of imports soar. Countries such as China reap an economic windfall as the prices of its gas and oil imports from Russia drop. The U.S. does not complain about the precipitous drop in the value of the Russian ruble. On the other hand, the US constantly complains that China continues to keep the value of its currency low to make its exports more competitive. Even last April, the US was still making noises about Chinese currency manipulation: However, the Treasury expressed concern about recent reports of Beijing's "heavy intervention" to keep the value of the currency low to gain trade advantages. A weaker yuan makes Chinese goods cheaper for Americans and makes U.S. goods more expensive for Chinese, giving an advantage to Chinese exporters. So far, there have been no complaints about the Canadian move. In the case of Canada the lower dollar will make the raw materials that are among the prime exports of Canada to the US cheaper so the move helps the U.S., but imports from China are mainly manufactured goods I would expect.

 Other exporting countries such as Australia may decide to follow the Canadian example to lower the value of their currencies to remain competitive globally and increase exports. Shares of exporters, such as West Fraser Timber Co. climbed after the rate cut and the fall of the loonie. The TSX index rose 1.8 percent after the cut as well. Some exporters price their goods in US dollars. David Garofalo, CEO of HudBay Minerals Inc. said: “For companies like ourselves that have operating costs denominated in Canadian dollars and revenues in U.S. dollars, it is a win.” For U.S. retailers close to the Canadian border who benefit from increased Canadian shopping the fall in the loonie will be a definite loss.

Iceland looking at Canadian currency to replace krona

Icelanders have toyed with the idea of doing away with their own krona currency and adopting the Canadian dollar or loonie as it is called since there is a loon depicted on one side. The krona has had its problems ever since the collapse of the Icelandic financial system in 2008.

Iceland has taken the initial steps to join the EU so one might think that the Euro would be a better currency to adopt. However the Euro zone is encountering problems itself.

Canada on the other hand has a strong banking system relatively low debt and a dollar that is just above par with the U.S. The U.S. has a much higher debt than Canada.

The Canadian ambassador was supposed to speak to a group about the issue but the Foreign Affairs Dept. of Canada said the ambassador would not be participating in a convention on currency conversion in Reykjavik the Icelandic capital.

A Bank of Montreal economist said that the conversion could be accomplished simply by Iceland buying enough Canadian currency. This might put some upward pressure on the loonie. The impact on Canada would probably be small as Iceland's population is only 317,000 and the economy less than one per cent of that of Canada. For much moresee this article.

Other countries such as El Salvador and Ecuador have unilaterally changed their own currency for the U.S. dollar. Kosovo did the same for the euro.