A darker trade outlook, softer housing market and a more dovish central bank have caught up to the dollar, as investors and currency speculators look elsewhere for greener pastures.
The once high-flying loonie has been losing ground to most major currencies since last autumn, but the gap has widened in recent weeks. The dollar fell to 97.03 cents (U.S.) – close to its lowest level in eight months – after the Bank of Canada left its benchmark interest rate unchanged at 1 per cent Wednesday and signalled that considerable monetary stimulus "will likely remain appropriate for a period of time" in response to weaker economic growth and in light of inflation remaining tame.
The weaker currency could provide a slight lift to exporters' profits, although this may be offset by the higher cost of imported materials and machinery, said Bill Hammond, chief executive officer of Hammond Power Solutions, a Guelph, Ont., company that makes electrical transformers and operates plants in Canada, the United States and Mexico. "But we'll take every penny or two or whatever it [the loonie] is going to decline."
The dollar has fallen since the beginning of the year against every key currency, apart from the embattled British pound and a Japanese yen that has been sinking as Tokyo acts to boost the country's competitiveness. The dollar has fallen nearly 5 cents against the U.S. greenback since Jan. 10 The drop might have been steeper had it not been for the attraction of Canadian government bonds to safety-conscious foreign investors.
"The trade fundamentals could easily put the currency in a tailspin. But what's standing against it is that we're an increasingly rare triple-A credit," said Avery Shenfeld, chief economist with CIBC World Markets. "And the world is still lapping up Government of Canada bonds as a result."
A depreciating loonie should help manufacturing exporters, who have suffered for more than a decade from a high currency that boosted their costs and eroded their competitiveness. But it will take more than a drop of a few cents to make an appreciable difference.
"It's kind of like chicken soup. It can't hurt," said Mel Svendsen, president of Standen's Ltd. in Calgary, which exports vehicle suspension gear.
"It would take quite a bit more to make a substantive difference in the economy," Mr. Shenfeld said. "A few cents between friends isn't going to cause a plant to relocate or change market shares appreciably for exporters."
The dollar would have to fall back to between 80 and 85 cents before companies started looking at relocating plants or production back to Canada, said Mr. Hammond, whose company pays for most of its materials in U.S. dollars and who keeps a close eye on currency shifts.
Mr. Svendsen noted that slightly lower prices won't boost demand from U.S. business people who have been delaying purchase decisions because of uncertainty about U.S. tax policy and the impact of austerity cuts.
"Those of us who are exporting, our sales numbers are down," he said. "We're thankful to pick up any kind of gain on the [currency] exchange. When times are tight, you count your pennies. And there are some pennies there. So we'll take them."
Meanwhile, speculators have the Canadian dollar squarely in their sights.
"Following a string of dismal economic reports, the loonie has come under severe pressure in recent weeks," Stéfane Marion, chief economist with National Bank of Canada, said in a research note Tuesday. "Speculators joined the party last week with an aggressive reversal" in Canadian dollar positions – the biggest short position in the currency since early last year.
Mr. Marion noted that the loonie is the only commodity-linked currency "that is actually being shorted by speculators," leading him to conclude that it looks oversold.
"The domestic outlook has dampened somewhat, and that has taken some of the shine off the Canadian dollar," said Camilla Sutton, chief currency strategist with Scotia Capital.