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Canada “Getting Clocked” by Something Far Bigger than Oil
Canada “Getting Clocked” by Something Far Bigger than Oil
Canada is likely in a technical recession, after the economy shrank for the first five months of the year. It’s heavily dependent on commodities. The oil bust and the broader commodity rout have been blamed liberally. The theory goes that the problem is contained. The oil patch may be wallowing in the mire. But no problem, the rest of Canada is fine.
The swoon of the Canadian dollar against the US dollar has caused a bout of false hope that this would make Canadian exports of manufactured goods more attractive to buyers in the US and elsewhere, and that the economy could thus export its way out of trouble. This theory has now run aground.
Because the threat to manufacturing in Canada comes from Mexico.
“I think Mexico’s just a cheaper place to produce, and you have enough human capital and engineering skills to produce almost everything you can produce in Canada and do it a lot cheaper,” Steven Englander, Citibank’s global head of G-10 currency strategy, told Bloomberg.
And the multi-year swoon of the Canadian dollar against the US dollar isn’t going to help. Over the last three years, the loonie has lost 25% against the US dollar, the peso 21%. Over the past 12 months, the loonie lost 16% against the dollar, but practically in lockstep with the peso.
This chart shows the move of the two currencies against the dollar as a percentage change from three years ago. It’s like a downhill tango:
So devaluing the loonie sounds like a good old central bank solution. But it hasn’t boosted exports of manufactured goods:
The US dollar value of non-oil exports from Canada to the US reached $32 billion during the peak month in 2008, crashed during the Financial Crisis, and recovered, but by 2012 started petering out at $30 billion a month, has since lost ground, and remains below where it had been before the financial crisis.
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Mexican Peso Dives, Fretting Begins About Peso Crisis
Mexican Peso Dives, Fretting Begins About Peso Crisis
“Everyone got used to playing with free, easy money. Now it’s going to cost us.”
On July 1, the Financial Times wondered just how low the Mexican peso could go, likening the ill-fated currency to a limbo dance: “Every month, it gets just that little bit lower.”
In the 20 trading days since, the peso has experienced eight record daily lows, in itself a record, even for Mexico. Not since the peso-dollar floating exchange rate system was established, on December 21, 1994, at the height of Mexico’s Tequila Crisis, has the currency notched up so many new lows in one single month. And there are still three days left to go!
At 16.25 pesos to the dollar currently, the peso has lost roughly 20% of its value against the dollar within a year. In December last year, with the exchange rate dropping to 14 pesos to the dollar, the country’s Exchange Rate Commission launched a currency intervention program in a bid to prop up the peso, or at least stymie its slide.
Like so many central bank interventions these days, it failed: by March, it took 15 pesos to buy a dollar. The Commission upped the ante, announcing it would conduct daily auctions of $52 million, without setting a minimum price requirement. That was four months ago. Since then, the peso’s value has continued to slide against the dollar, and the pain is beginning to show.
As El Financiero reports, although inflation, at around 3% , remains at historically low levels, pressures are beginning to rise. Some imported goods, including medical appliances, plastics and petrochemicals have registered price increases of between 10% and 15% over the last couple of months. With external trade accounting for 63% of the national economy, the impact is unavoidable. Particularly hard hit are companies with heavy debt loads denominated in dollars.
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