Loonie sinks on economic news, profit taking
OTTAWA – More clouds over the U.S. financial industry and a report showing Canada's manufacturing and forestry output declined in November, combined to help push the loonie down by more than a cent today.
The loonie fell 1.06 cents US to close at 99.62 cents US in Toronto on Thursday, just a day after the Canadian currency closed above the U.S. dollar for the first time since early January.
Earlier in the day, the loonie fell by as much as 1.55 cents US in intraday trading – the biggest one-day drop in 2 1/2 months – after Statistics Canada reported that the Canadian economy barely edged forward in November.
Output from the depressed Canadian manufacturing sector decreased 0.3 per cent in November, reaching its second-lowest level since the beginning of 2007.
Overall Canadian production of goods fell 0.2 per cent from October and the gross domestic product, a measure of the economy as a whole, gained just 0.1 per cent.
The Bank of Montreal said the small November gain – half as big as the growth registered in October – supports the view that the Canadian economy is braking and will likely record a 1.5 per cent growth rate in the fourth quarter, down from 2.9 in the third.
The bank's senior economist, Sal Guatieri, noted that with U.S. demand for Canadian products easing further, exports of manufactured goods will apply an even greater drag on the economy going forward, as will a slowdown in construction.
Still, the Canadian economy is expected to outperform its bigger southern neighbour going forward, particularly because of the robust employment situation and strength in sectors such as oil and minerals.
"The Canadian economy should be able to muddle through this rough patch without too many wounds," predicted TD Bank economist Pascal Gauthier.
That may not be the case for the U.S. and more bleak news came out Thursday, including the rating downgrade of a major American bond insurer as part of the unfolding subprime mortgage crisis that has floored the entire housing market and shaken consumer confidence.
The bond insurers, or monolines, offer a potential lifeline to banks affected by subprime woes, providing some insurance against credit losses. If the monolines are in trouble, that means less available relief for financial institutions already struggling with losses related to bad subprime mortgages.
As well, initial U.S. jobless claims for the week ending January 26th jumped to 375,000 from 306,000 in the week prior, further indications the American economy is slumping.
In Canada, the deepest pocket of weakness in November was the forestry and logging sector, which saw output drop 2.1 per cent during the month and was 11 per cent lower than last year.
As it has for most of the year, the Canadian economy was able to keep its head above water thanks to consumers and the services sector, which advanced 0.4 per cent and 0.2 per cent respectively in the month.
After falling below 97 cents US last week, the loonie surged past parity this week to close at 101.31 cents US on Wednesday, largely in reaction to the Federal Reserve's aggressive attack on interest rates in an attempt to forestall a U.S payday loans in 1 hour. recession.
"The Canadian dollar's reaction was large, so it was a bit of a surprise because the gross domestic product (report) wasn't really that far from what economists were expecting," said CIBC senior economist Avery Shenfeld.
"You could also look at this in the context of the loonie having gained that ground in the last few days. It was a correction and might not all be due to the GDP report."
Opinion is divided on whether an American recession is unlikely, probable or already here.
Shenfeld, for one, doesn't believe the U.S. has yet slipped into a recession, saying other indicators, such as factory orders and household spending remain on the positive side of the line, if just barely.
Still, following the U.S. Federal Reserve's 125-point slashing of interest rates in the past two weeks, a growing consensus among economists believes the Bank of Canada will have little choice by to speed up its easing of rates as well, with forecasting a one percentage point drop by the end of June.
"One could have argued they should have cut half-a-point in January, but as it gets evidence of the U.S. slowdown, I think the bank will move up the pace for its next rate cut (on March 4)," Shenfeld said.
The central bank's senior deputy governor Paul Jenkins told a Commons committee on Wednesday that the bank regards a range of about 90 to 98 cents US for the loonie as justified by the fundamentals, such as commodity prices.
He said the bank would likely intervene if the dollar deviates too far from the range.