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In this market, the loonie doesn’t cut it as a safe haven

Two weeks ago, the Canadian dollar was above $1.06 (U.S.) and the talk was it might hit $1.10 before the end of the year. Fast forward to Monday, and the dollar was less than a penny above par, closing at 100.92 cents.

What a difference a little global crisis-of-confidence can make.

With world markets shuddering after the U.S. credit-rating downgrade, and renewed worries over unsupportable European government debt, currency investors are looking for havens. Unfortunately, despite the country's relatively healthy economy, Canada doesn't make it into that category when a severe crisis hits.

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Ironically, despite the fact that the United States is the centre of many of the current worries, investors are pouring money into U.S. debt because the U.S. dollar is still the place to be when the world is in such turmoil. Most other currencies, including Canada's, are falling as a consequence.

Put simply, "in times of crisis, the U.S. dollar is a safe haven," said Camilla Sutton, chief currency strategist at Scotia Capital. "We see tremendous flows moving into U.S. Treasuries … and that weakens any other currency that is not also a safe haven."

Indeed, among the major currencies, only the U.S. dollar, the Japanese yen and the Swiss franc still truly qualify as havens in these kinds of markets, Ms. Sutton said. "Regardless of where the epicentre is, [the United States] still has the deepest capital markets in the world [and it] receives the liquidity flows when markets are in chaos."

The franc and the yen both rose sharply in trading Monday.

While the Canadian economy has performed well since the recession, the plunge in oil prices over the last few days has accelerated the decline in the Canadian dollar. In addition, Canada's close trade ties with the U.S. mean any economic issues south of the border could dent economic growth north of the border. And European countries are still big trading partners for Canada, giving us exposure to the other big problem child on the globe.

But Canada is not alone in this situation. The Australian dollar, which has also performed well in recent months, has seen a sharp decline relative to the U.S. dollar in the last few days, despite its stronger links to the still-booming Asian economy. The fall in commodity prices has made things worse for the Aussie dollar, just as it has for the Canadian dollar.

David Watt, senior currency strategist at RBC Dominion Securities, said Canada, Australia and other strong small- or mid-sized countries could see themselves re-emerge as havens if things get even worse in the United States. A further credit downgrade from Standard & Poor's, or another downgrade from a different agency, could prompt asset managers to look beyond the U.S., and Canada could end up on their radar screens.

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"We still have triple-A banks, we're still a triple-A rated sovereign, and our fiscal situation is improving," he said, and that would be enough to draw investment – and boost our currency again – if the U.S. deteriorates further.

Tom Courchene, a professor of economics at Queen's University in Kingston, Ont., said he too could see a worsening of the situation in the United States causing money to flow into Canada and pump our currency back up sharply .

But he thinks this kind of volatility is dangerous and unproductive.

Mr. Courchene has been an advocate of firming up links between the Canadian and U.S. currencies – even suggesting a move to a fixed exchange rate – to help smooth out the wild ups and downs that have hammered Canadian manufacturers and exporters.

"[The U.S.] is still our biggest market and we're just too small to prevent these whiplashes in the currency," he said. Mr. Courchene acknowledged that the prospect of fixing our exchange rate to that of the United States is not popular with the public or other economists, but said it may become more acceptable if currency volatility accelerates.

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About the Author
Reporter, Report on Business

Richard Blackwell has reported on Canadian business for more than three decades. At the Financial Post and the Globe and Mail he has covered technology, transportation, investing, banking, securities and media, among many other subjects. Currently, his focus is on green technology and the economy. More

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