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If there's one thing holding the Canadian dollar aloft, it's the market's faith that the rising U.S. economic tide will float Canada's boat. This time around, that's a pretty leaky argument.
As Pierre Lapointe, head of global strategy and research at Pavilion Global Markets Ltd., said in a research note Monday, Canada's heavy reliance on exports to the United States has traditionally made the Canadian market a "derivatives play" for the U.S. – moving more or less in concert with U.S. fortunes. The expectation that this will again be the case now, as U.S. growth accelerates, has helped keep the Canadian currency a relative outperformer in the global foreign-exchange market, even as Canada's economy lurches.
"However, in the current cycle, we believe several factors point toward Canada benefiting significantly less from U.S. strength," Mr. Lapointe wrote.
I'm generally not a big fan of "it's different this time" economic arguments; typically when I hear someone saying them out loud, I take this as whistling-in-the-dark evidence that it really isn't different this time. In more than two decades of paying attention to this stuff, I've found it's almost never different this time.
Yet Mr. Lapointe makes some compelling arguments. He lists off "a host of domestic structural issues" in Canada that will seriously dilute the usual benefit from an accelerating U.S. economy.
Chief among these is the stubbornly strong dollar itself – which, despite Canada's relative economic weakness and the erosion in commodity prices, remains not far from parity with the U.S. dollar.
The currency's persistent strength over the past decade has made Canada's non-commodity exports distinctly uncompetitive. Mr. Lapointe noted that 10 year ago, Canada accounted for 4.5 per cent of global exports; today, it's just 2.5 per cent. Even if a U.S. recovery spurred increased demand for Canada's commodity exports, there's no reason to think Canada's non-commodity exports would experience a matching demand increase.
Even on the commodity side, a U.S. demand surge might not do much for Canada. The chief Canadian commodity export to the United States – oil – is being increasingly displaced by plentiful (and cheaper) supplies from the rapid development of U.S. shale oil.
Mr. Lapointe added that the Canadian housing market, which historically has moved up whenever the U.S. housing market has recovered, has its own problems that will keep it from following the U.S. While a housing recovery will be a big component in the U.S. economic expansion, Canada can't count on much if any housing contribution in its own growth – another source for divergence between the two countries' economic paths.
A cheaper Canadian dollar would not only help, but would be entirely warranted. However, that might be hard to achieve if an accelerating U.S. economy renews the rally in commodity prices, especially oil – as the loonie is firmly established in forex markets as a "petrocurrency," its fate closely tied to the price of crude.
We may well need a move by the Bank of Canada – at very least, a removal of the bank's long-standing bias toward eventual interest-rate hikes – if we're going to convince forex traders that, indeed, Canada is different this time.
David Parkinson is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights, and follow him on Twitter at @ParkinsonGlobe.
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