Canadian dollar

From maple leaf tattoos to stitching flags onto backpacks, Canadians are obsessed with not being American. Strange then to cheer reaching parity with the US dollar, which happened briefly last week. Canada’s currency last reached a one-to-one exchange rate against the greenback just before the wheels fell off the world in late 2007. It then plunged by about one-third as so-called risk currencies were shunned – and enjoyed a resumed northward advance once markets hit bottom.

To be sure, that Palm Springs condo must be looking pretty tempting for Manitoban retirees about now. But a strong “loonie” does nothing for exports, which accounted for more than one-third of gross domestic product before tumbling 14 per cent last year. Exports are still a quarter below peak levels in absolute terms and Canada’s historically high trade surplus has more or less vanished.

But a surging currency may not hurt the economy in the traditional way. Much of what Canada exports is denominated in US dollars. So it is not a fall in relative competitiveness that is the problem rather than a straight translational effect. Canada’s exporters get less for their goods in local currency terms. Indeed, some hope domestic productivity may be boosted, as 80 per cent of Canada’s machinery and computer systems are imported and priced in US dollars. Decisions on whether to upgrade by local companies, however, seem to be independent of the exchange rate. Toronto-Dominion shows that capital investment growth in 2007, with a strong loonie, was half that of 2006.

Canada’s government and central bank understand the danger. But they have no chance to talk down the currency while commodity prices are rocketing and risk tolerance is back. As in 2007, the best chance for a cheaper loonie lies in the wheels falling off the world economy.