Canada export agency warns on risks from high loonie

Tue Oct 27, 2009 9:32am EDT
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By Randall Palmer

OTTAWA (Reuters) - The Canadian dollar is seriously overvalued and the country could slip into a double-dip recession if the currency stays at current levels, the government's export agency said on Tuesday.

Export Development Canada said in its Global Export Forecast that economic fundamentals peg the dollar at 86 U.S. cents (C$1.16 per U.S. dollar) and the economy could again shrink if it stayed around 95 U.S. cents (C$1.05 per U.S. dollar).

"EDC analysis of global fundamentals suggests that the Canadian dollar should average closer to 86 cents against the U.S. dollar through 2010 as reality returns to commodity markets and prices begin to reflect underlying supply-demand fundamentals, with modest gains expected in crude oil and base metal prices," it said.

EDC Chief Economist Peter Hall said current foreign exchange rates were not based on fundamentals.

"What we're seeing with the higher Canadian dollar right now is a strong speculative influence, not a fundamental shift," he said.

"If investors remain bullish on commodities like oil and copper, and commodity currencies, this could drive the value of the loonie higher, with devastating effects not only to the Canadian exporter, but to the recovery itself."

He said if the Canadian dollar stayed around 95 U.S. cents through 2010 this could shave as much as 2 to 3 percent from Canada's gross domestic product.

This would mean slipping back into recession after growth in the second half of this year. EDC projects growth of 1.9 percent next year after contraction of 2 percent this year, based on a dollar of 86 U.S. cents.   Continued...