Speed of loonie's rise troubles economists

OTTAWA -- The Canadian dollar’s three-week offensive on the U.S. greenback brought it ever closer to parity on Wednesday, but raised concerns its unrelenting pace could become a “huge concern” if it continues unabated.

Propelled by a series of solid economic reports, the loonie has gained almost 5% over the past two and a half weeks, and closed Wednesday up 36 basis points at 98.98 US cents.

The race to parity has not elicited the usual hand-wringing about how the high dollar will hurt Canada’s exporters. Industry Minister Tony Clement added his voice to the argument Wednesday, arguing, as did Finance Minister Jim Flaherty a day earlier, that Canadian companies are adjusting by improving their productivity.

Yet TD Economics issued a report Wednesday warning that the dollar’s rapid climb, as much as its higher value, could put a dent in the country’s rosy economic performance, which has been marked by gains in gross domestic product, manufacturing, productivity and employment. The latest economic indicator came Wednesday in a report showing Canadian wholesale sales surging 3% in January to $44.4-billion, the biggest increase in three years.

“It’s a pace of appreciation that we think is unsustainable,” said TD economic strategist Millan Mulraine. “You can’t expect a currency to appreciate like this.”

“With currencies there are always two concerns,” he said. “One is the level it reaches and the other is the speed of adjustment.”

Given time, exporters can adjust to changing currency values, Mr. Mulraine said. The current run has not been enough to cause serious concern, but if it were to continue, it could seriously hurt competitiveness on global markets for Canadian exporters, he said.

But the dollar likely has a ways to go before easing off. According to Mr. Mulraine’s report, a model used by TD to estimate the loonie’s fair value pegged it as undervalued by 5 US cents in January, when it was trading in the 96-cent range.

Mr. Mulraine is currently updating the estimate, which he said could very well have risen in recent weeks.

Benjamin Reitzes, an economist at BMOCapital Markets, said he expects the loonie to reach parity on Friday if inflation data released that day proves to be anything higher than the 1.6% estimated by the Bank of Canada.

Mr. Mulraine said a strong read on retail sales, also coming Friday, could also help push the loonie to parity, but added it could come a day sooner, if inflation figures out of the U.S. Thursday prove soft and put pressure on the U.S. dollar.