A decade ago, Canada set out to become an energy superpower. Now, it enters 2016 riding down one of the world’s most battered petro-currencies.
When the clock struck midnight on Dec. 31, the loonie, so-called for the bird engraved on the dollar coin, officially recorded its longest and deepest downturn since it became a floating currency in 1970. And there’s no relief in sight.
The loonie’s 16 percent decline against the U.S. dollar over the past year marks its third straight annual decline. The currency has lost more than a quarter of its value since 2012, falling to 72.27 U.S. cents from $1.01. That’s almost a penny a month.
In the 45 years since Canada ended its currency peg to its largest trading partner — a period spanning two votes on Quebec separation, a full-blown fiscal crisis, a previous Saudi- engineered oil price rout and several recessions far worse than the shallow contraction early last year — no dollar depreciation has been this bad for this long.
Canada is in the midst of an identity crisis. In the 2000s Canada was the commodity producer to the U.S. In the ‘90s, Canada was the manufacturer to the U.S. Today, Canada’s identity is unclear.
Emanuella Enenajor, senior economist covering the country for Bank of America Merrill Lynch in New York
Canada, the envy of the world for weathering the 2008-09 global financial crisis better than almost any other developed country, has suddenly lost its footing in the global economy. The high oil prices and increased oil sands production that fueled growth for a decade look unlikely to return soon, prompting an unusual level of soul-searching about just what kind of economy the country has built.
“Canada is in the midst of an identity crisis,” said Emanuella Enenajor, senior economist covering the country for Bank of America Merrill Lynch in New York. “In the 2000s Canada was the commodity producer to the U.S. In the ‘90s, Canada was the manufacturer to the U.S. Today, Canada’s identity is unclear.”
Shortly after becoming prime minister in 2006, Stephen Harper, who represented a Calgary constituency in Parliament, went around the world talking up his country as an “emerging energy superpower” and comparing development of the oil sands to the building of the Great Wall of China or Egypt’s pyramids.
He was pushing on an open door. China’s rapid industrialization was driving up demand and prices of commodities worldwide, including crude. As prices began their ascent to $100 per barrel and beyond, investment flooded into Canada’s oil-sands, the third largest crude reserves in the world.
The loonie climbed from an all-time low of 61.76 U.S. cents in the first quarter of 2002 to an all-time high of $1.10 at the end of 2007. It tracked the price of oil down through the financial crisis and then headed back to par with the greenback from the middle of 2010 until late 2013 as crude rebounded.
“We were becoming that one-trick pony,” said Darcy Browne, head of institutional foreign exchange sales at Canadian Imperial Bank of Commerce, who’s been trading currencies in Toronto for 26 years. “What else has Canada done? We’re not diversified enough.”
Although a dollar at parity with the U.S. currency is a point of pride for many Canadians, it also created tensions between the commodity-trading regions in western Canada and the manufacturing heartland in Ontario and Quebec, which preferred a lower dollar to stimulate exports.
By the middle of 2014, oil’s share of Canada’s total exports reached 19 percent from about 6 percent a decade earlier. Meanwhile, the Ontario-based auto industry was seeing its share of the export pie fall to to 14 percent from 22 percent. The heavier reliance on crude became an issue in last October’s national election, as Harper and his Western-based Conservatives were accused by all their opponents of having favored oil to the detriment of other regions.
In the process, the Canadian dollar had effectively joined the ranks of petro-currencies. The correlation between movements in the price of oil and the loonie has increased five-fold since 2000, according to data compiled by Bloomberg. In 2015, while all commodity-exporting countries faced currency pressure, the Canadian dollar was more sensitive to oil price movements than such petro-states as Mexico, Norway and Russia.
Diversifying away from resources now becomes a major challenge for the country’s new Liberal government, led by Justin Trudeau, according to David Dodge, governor of the Bank of Canada from 2001 to 2008 and a former deputy minister of finance under both Conservative and Liberal governments.
Canada’s relatively strong performance in the Great Recession “looks more like a blip” in retrospect, he said in a telephone interview. The steepness of the dollar’s drop indicates the markets have little confidence that investment will return anytime soon to the high-cost and carbon-intensive oil sands, Dodge said.
The road he sees ahead is to restore the emphasis the Mulroney government in the 1980s and the Chretien government in the 1990s placed on building up the manufacturing and service sectors.
In its effort to become an energy superpower, Canada neglected technological development, Dodge said. “So we’re going to have to go back, having lost a decade on the technological side,” he said.
Though most forecasters see 2016 marking the end of the decline, predicting the loonie will finish the year higher than the 11-year low of 71.44 U.S. cents it hit in December, a growing number, including Bank of America’s Enenajor, expect it to fall further to 69 U.S. cents first. Almost all agree the Canadian dollar won’t be seeing parity again any time soon as the country struggles to fire up new growth engines.
“The price of oil is not high enough to justify Canada to be a commodity superpower, and the Canadian dollar is not weak enough, and certainly the manufacturing sector has not healed enough, to have Canada be a manufacturing superpower either,” Enenajor said. “So Canada is absolutely stuck in this very awkward place.”