Economics and the mid-life crisis have much in common: Both dwell on foregone opportunities

C'est la vie; c'est la guerre; c'est la pomme de terre . . . . . . . . . . . . . email: jpalmer at uwo dot ca

. . . . . . . . . . .Richard Posner should be awarded the next Nobel Prize in Economics . . . . . . . . . . . .

Friday, January 07, 2005

Whither the Loonie?

The chief economists of Canada's five largest banks have different forecasts [from The National Post; Date: Jan 6, 2005; Section: Financial Post; Page: 42, subscription required (thanks to JA for the info)]:

CIBC (Shenfeld) 77 cents U.S.
Royal (Wright) 80
BMO (Egleton) 80
TD (Drummond) 84
BNS (Jestin) 90

The wide variance is intriguing.

The large increase in the U.S. price of a Loon last year had a bit of a negative impact on the demand for Canadian produced goods, especially manufactured goods which are traded internationally.

If Parliament and the Bank of Canada cave in to the interests of the owners and employees of those firms, we might very well see lower interest rates in Canada brought on by an increase in the supply of lendable funds, and more exports of Canadian goods and services. Given that we have a minority gubmnt, there is good reason to expect them to cave in to short-term lobbying. And given that three of the five experts predict a decline in the Loonie from its current value, maybe this isn't such a bad guess.

But much of what happens to the Loonie will depend on what happens to the U.S. dollar. Some are pretty optimistic about the strength of the U.S. dollar (see Sparky's forecast here, for example, where he essentially but more politely asks, "so what is everyone gonna hold instead of dollars, huh?"). I'm more concerned about U.S. fiscal deficits, though, as I have posted earlier (and here, too). If central bankers and in other countries and major investors lose confidence in the U.S. dollar, look for it to fall against all currencies, including the Loonie, in which case the Loonie could rise. As Warren Jestin says,

The reasons for the ongoing erosion of the U.S. dollar against major world currencies are straightforward. Global investors, including central banks, are bound to become increasingly reluctant to add to already heavily overweight U.S. dollar positions, particularly with no end in sight to the U.S. government’s enormous borrowing requirements. Dollar depreciation adds to this nervousness and encourages diversification into non-U.S.-dollar-denominated assets.

Even though I tend to agree with Jestin, if I were a corporate planner, I'd take an average and contrast that with the forward rates.
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