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Winter of our discontent: CIBC sees a 93-cent loonie

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Loonie to sink, CIBC says CIBC World Markets expects the Canadian dollar to sink to about 93 cents (U.S.) this winter. And that's still overvalued, its economists said in a research note today. The loonie's fall from grace will come as the economy softens and the Bank of Canada holds interest rates at their current level.

"Canadian growth will average no better than 2 per cent over the next few quarters, with the drag coming not just from trade, but also from housing and a less robust consumer sector," the CIBC economists said.

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"The labour market is already showing signs of deceleration, and house prices are edging lower, both of which are a negative for household wealth and hence consumption spending.

"With no support from further rate hikes, look for the C$ to depreciate to some 7 cents weaker than parity over the course of the coming winter, as the economic recovery shifts into a 'new phase' of greater uncertainty."

Even at that level, the currency will still be overvalued according to CIBC's model, which looks at things such as commodity prices and the difference in interest rates between Canada and the United States.

Canada's economy rebounds That said, Canada's economy rebounded in August, following a down month in July, driven largely by the energy sector, though also by manufacturing.

Real gross domestic product expanded by 0.3 per cent, following the 0.1-per-cent dip in July, Statistics Canada said today. That matches the expectations of economists.

The oil and gas industries bounced back by 1.5 per cent, the federal statistics gathering agency said, with production of both climbing. Manufacturing, which has been hit by both a strong Canadian dollar and the recession, rebounded 0.5 per cent, though just 13 of 21 groups rose.

"Along with continued headwinds from abroad, the high level of household debt suggest that the Canadian consumer cannot continue to be the same driving force for economic growth as it was over the last year of economic recovery," said Toronto-Dominion Bank economist Diana Petramala.

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"This will be most evident in the housing sector, where we expect residential investment to act as a drag on economic growth through the rest of this year and 2011.

"Given the great amount of uncertainty around the global economic outlook, it is likely that the volatility in economic growth seen over the last few months will persist. And, on average we anticipate economic growth to move at a snail's pace over the next year with quarterly gains in the range of 1.5 per cent to 2 per cent. At this rate, this Canadian economic recovery will be the slowest on record."

U.S. economy struggles The United States also released GDP data today that showed an economy still struggling, one that's still not strong enough to get people back to work in meaningful numbers.

Hurt by a still embattled housing industry, the U.S. economy expanded at a modest annual rate of 2 per cent in the third quarter, the Commerce Department said. That's marginally better than the 1.7-per-cent growth in GDP in the second quarter, but it's not enough to bring down a high unemployment rate.

Not only is today's reading the last before the Federal Reserve meets next week, when it's expected to unveil new stimulus measures, it's also the last of the major economic reports before the U.S. midterm elections next Tuesday.

The U.S. central bank is expected to unveil a fresh round of quantitative easing, dubbed QE2, when its two-day meeting ends on Wednesday. Investors have been speculating on the size and scope of those measures, speculation that has roiled stock and currency markets.

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"There are two ways to look at the current reading of U.S. real GDP," said Toronto-Dominion Bank senior economist James Marple.

"On the one hand, growth continues to be positive and the level of GDP is now 3.5 per cent above the bottom reached in the second quarter of 2009. On the other hand, with a growth just below 2 per cent over the past two quarters, the unemployment rate has remained frozen at 9.6 per cent and core inflation has trended further below 1 per cent (reaching 0.79 per cent in September).

"With little ambiguity, the other hand wins the day - from the point of view of the Federal Reserve, continued high unemployment and low inflation are unacceptable outcomes, demanding more in the way of monetary stimulus to help boost the recovery."

Added senior economist Jennifer Lee of BMO Nesbitt Burns: "The U.S. data do not change the view that there will be action by the Fed when they meet next week ... the only question is will it be a 'shock and awe' effect, or a 'Wha? Ah!' response."

Japan continues to suffer Japan's economic fortunes are sinking further, based on several bits of data released today. Industrial production fell in September for the fourth consecutive month, slipping by 1.9 per cent from a month earlier. Household spending was flat and the construction sector softened.

Core consumer prices, which exclude out volatile measures, fell by 0.6 per cent from a year earlier. That was the 22nd month in a row of declines.

The country's jobless rate, however, slipped to 5 per cent from 5.1 per cent.

Apple surges past RIM Apple Inc. has overtaken Research In Motion Ltd. in the heated smart phone battle. And notably, Nokia Corp. is slipping.

According to new research by International Data Corp., shipments of Apple's popular iPhone eclipsed those of RIM's BlackBerry in the third quarter for the first time, 14.1 million to 12.4 million. Apple's share of the market surged to 4.1 per cent in the quarter from 2.5 per cent a year earlier, IDC said.

RIM's no slouch, though. While it trailed Apple, its share of the market jumped to 3.6 per cent from 2.9 per cent and marked a quarter with a record number of shipments.

"The BlackBerry maker continues to grow in Latin America, for example, due to the success of the Curve 8520 entry-level model, which has helped drive growth in most emerging markets," IDC said. "The vendor's results were also boosted by the introduction of the higher-cost Torch in the United States, a key market due to the size and intensity of competition."

Of Apple, IDC said that "the company's record shipment performance can be attributed to the introducation of the iPhone 4 in 17 new countries last quarter. The record performance came despite 'Antennagate,' the name used to describe the controversy around alleged iPhone reception problems, in July."

Apple, RIM and Google Inc. have been in an incredibly fast-paced race amid competition involving the iPhone, BlackBerry and models using Google's Android system, in a market that's growing dramatically.

"Apple, RIM, and the vendors producing Android-based smart phones have put noticeable pressure on Nokia, the overall market leader," IDC said, reporting that Nokia's market share slipped to 32.4 per cent from 36.5 per cent amid tepid growth in shipments.

Analyst upgrades Potash, Agrium UBS Securities Canada has raised its outlook for stocks of Potash Corp. of Saskatchewan and Agrium Inc. .

Yesterday, Potash Corp. reported stellar earnings, and Agrium reports next week. Potash, of course, is also the target of a hostile takeover bid by BHP Billiton Ltd. and now the focus of heated debates over whether to protect the Canadian resource giant from a foreign bid.

UBS analyst Brian McArthur said in a research note today that the granular potash market in North America has become "very tight" recently, leading to two sharp increases in prices.

He raised his 12-month price target on Potash stock to $175 (U.S.) from $170, and on Agrium to $97 from $95.

From today's Report on Business

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About the Author
Report on Business News Editor

Michael Babad is a Report on Business editor and co-author of three business books. He has been with Report on Business for several years, and has also been a reporter and editor at The Toronto Star, The Financial Post and United Press International. His articles have appeared in major newspapers around the world. More

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