Canadian Economic Balance: Wanted Robust US Growth

CANADAUSEconFor many Canadians March is a time where they travel to far-off lands.  One favorite destination for Canadians is to go to the Caribbean, the land of sun, surf and sand.  It just so happens that many of the travel resorts in that region use the US dollar.  So with the loonie getting close to $1.03 US, there will be quite a few happy, sun drenched Canadians.  It was only back 10 years ago when maybe some of the same Canadians were paying a 40% premium for their fun in the sun.

No, this is not another column about the value of the Canadian dollar.  I know my editor and good friend John Gardiner has his eyes glaze over sometimes when I write about the value of our lovable loonie.  Yes, I must admit I get a real kick out of figuring out its value and making  some prognostications, but it is not for everybody.  That high Canadian dollar at the present time is a reflection of the health of the greater Canadian economy.

At the present time the Canadian dollar is about as high or at least in the same atmosphere as it was in late 2007.  It is responding in the currency market where the US dollar is getting whacked.  Yes, there are many Canadian economists who equate the value of the Canadian dollar with the price of oil.  I don’t drink that Kool-Aid, believing it is always more an inverse of the US dollar.  Needless to say the latest iterations of the value of the Canadian dollar have much to do with our gross domestic product coming in at 3.3% annualized rate for the fourth quarter of 2010.  As annualized rates go in the developed world, 3.3% is almost like the heady days of pre-recession.

The US currency of course is the world’s default money.  So it almost every part of the world everybody wants it for those valuable commodities.  However, over the last few days the US Federal Reserve has intimated that interest rate increases aren’t in the cards.  Our American friends still have real problems with the US economy.  So the US Federal Reserve wants to keep interest rates low as well as continuing to infuse another $600 billion of quantitative easing into the economy by the end of June 2011.  All of this is negative for the US greenback.

This has been compounded to some extent by a statement from Jean-Claude Trichet, the president of the European Central Bank.  Last week he gave the signal that the Europeans might be thinking of raising interest rates.  So currency traders and their related speculator friends are poised to take their money elsewhere.  This all moves in a very fluid fashion, but it is just another reason that the Canadian dollar has found so much strength in the last couple weeks.

In many ways it is a collective pay raise for Canadians and collect pay cut for our American friends.  For instance, those sundrenched Canadians can drink 40% more in the Caribbean for the same price as they did 10 years ago.  At the same time it would cost our American friends about the same.  The big differences when you are the world’s default currency, lots of times our American friends don’t feel the pay cut.  It’s everybody else around the world who are buying products in US dollars.  They have to pay less in their currencies, which generally spurs commodity prices.  Meanwhile our American friends are hoping this greenback debasement combined with the last vestiges of quantitative easing brings them out of recession.

Of course none of this is easy.  It is all a moving target, but what makes it interesting this time is that our economist friends are fooling around with the world’s default currency.  In Canada’s case, for whatever reason our economy is doing quite well and our unemployment rate is sitting at 7.8%.  In parts of western Canada we are even importing labor to do jobs nobody else will do.  Consider this question.  How well would the Canadian economy be doing if our American friends ever burst out of recession with robust economic growth?  That’s something to consider.

It is coming.  Of course, the question is when?  The American economy has been very, very slow to get off it’s feet.  There are still a structural problems there.  Needless to say, never is a long time and the US economy eventually will be back in a big way.  When that happens, our economic growth should be off the chart.  The hard part is waiting.  In the meantime, the value of the loonie may surely be the Bank of Canada’s greatest challenge.  Nobody wants to spoil the party.  It’s all in the economic balance.