Is Canada Dollar Dancing To a `Loonie' Tune?
TORONTO money traders have jokingly referred to the slow-sliding Canadian dollar as the ``Canadian Peso'' ever since Mexico's currency meltdown in December. That joke fell flat this week.
Tuesday, the Canadian dollar dropped nearly two-thirds of a cent during frantic global trading before the Bank of Canada intervened to raise short-term interest rates by almost a full percentage point from 7.24 percent to 8.21 percent.
At the end of the day, the Canadian dollar coin - which most Canadians call the ``loonie,'' since the loon (the national bird) is stamped on it - was worth a half-cent less. It started the day at 70.49 US cents and ended down 0.44 of a cent at 70.05 cents. Wednesday it closed at 70.36 cents.
Behind this jolt, analysts say, are some tightly wound international investors, some of whom were burned by Mexico's peso plunge and who may feel that the Canadian dollar is more vulnerable than most people - especially Canadian politicians - think.
``Our prime minister certainly is trying to drive home the fact that Canada's economy is quite different than Mexico's,'' says a Toronto currency trader who asked not to be named. ``But given the fact that a lot of people are asking the question [whether Canada's currency could reach meltdown, too] implies there could be some vulnerability.''
Canada's currency vulnerability is due to a combination of high national-debt loads, high federal deficits, and whether Quebec will vote to separate from Canada this spring. None are new concerns. Yet all are partly responsible for a 20 percent slide in the Canadian dollar's value since it peaked in 1991 at around 87 US cents.
But comparing Canada, which has a developed economy, and what many say is an undervalued currency, with Mexico's underdeveloped economy and overvalued peso is unfair, some analyst say.
``Other than the fact that both countries have the same number of letters, there are few similarities,'' says John Johnston, deputy chief economist at the Royal Bank of Canada. ``When the Mexico thing blew up, that raised market sensitivities to all these other issues,'' he says. ``You're not so concerned about the hole in the roof until it starts to rain.''
Canada's federal deficit of $40 billion (US$28 billion) in 1994-95 will bring Canada's net public debt to $551 billion. Some worry continued high deficits will create a Mexico-style currency crisis.
Much hangs on the federal government's release of its new 1995-96 budget expected in late February.
Finance Minister Paul Martin has promised tough program cuts and a deficit no larger than 3 percent of gross domestic product by 1996-97. If he does not deliver, or if he achieves it using higher taxes, analysts say it could plunge the dollar further.
``My feeling is that it [the public-debt problem] won't change until we have a massive crisis,'' said Albert Friedberg, a leading Canadian currency trader, in comments to a Toronto-based Globe and Mail columnist.
He defined ``massive crisis'' as a one-day, 10 percent fall in the dollar's value.
Some, including the prime minister, attribute the dollar's sudden weakness to scrutiny of Canada's debt load by the international press.
In December, the Monitor published an article highlighting economists' concerns that Canada - one of the world's top seven industrialized nations - might ``hit the wall'' and fail to gain foreign financing for its debts if it doesn't reduce them. The Washington Post held that Canada is brewing ``a dollar crisis.''
Last week, the Wall Street Journal ran a news story that called Canada's currency a ``basket case,'' and a subsequent Journal editorial said Canada's debt load had made it ``an honorary member of the Third World.''
Prime Minister Jean Chretien spent much of last week complaining about having his country compared to the third world by a United States newspaper. By Tuesday, however, he and Mr. Martin were working to reassure the currency markets.
``We're disappointed but we are not alarmed,'' Mr. Chretien said. ``There is a lot of movement for a lot of currencies around the world. The same thing affects many other currencies at this moment, probably because of the crisis earlier in the month with the peso.''