Weaker loonie will help the Canadian economy

WATCH: business editor Jamie Sturgeon takes us through what it means for the Canadian economy due to the falling loonie.

There appears to be a ‘woe is me’ mood surrounding the Canadian dollar. It is at levels of weakness not seen since 2009 against the British pound, Euro and US dollar so that air of gloom is understandable but the reasons for that weakness and the positive effect it will have on Canada’s exports are being underplayed.

The weakness derives from a slowdown in China’s demand for commodities, from the fragility in the US recovery and in the fragile post-crisis state of Canada’s recovery as well. However, Bank of Canada Governor Stephen Poloz tried to reassure the markets that two months of positive Canadian inflation had steadied his nerves. In fact the inflation rate was the highest in 18 months and that has definitely stopped the rot – for now.

Those who need the Canadian dollar to strengthen will be wishing for an improvement when the second estimate of Canada’s Q4 economic growth is announced on Friday. If the annualised 2.7 per cent is confirmed, the Canadian dollar may well establish a base camp at C$ 1.12 against the US dollar and C$1.86 against the pound. If US growth is revised upward, the USD and CAD dollar will most likely strengthen against the pound but, so weak is the loonie that the potential is greater there.

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Of course, the opposite is also true and a drop in either the US or Canadian GDP data will weaken the loonie and the targets are C$1.93 against the pound and C$1.15 against the US dollar. That would play into the hands of Canada’s exporters and that might be just what the doctor ordered for Canada’s economy. Export growth will boost domestic disposable income and the government’s tax take and will enhance the balance of payments so why wouldn’t Canada want a weaker loonie.

There is no doubt that whatever happens with the GDP data, we will have a volatile end to the week and the month. Within that volatility lies the opportunity for both buyers and sellers of Canadian dollars to do well.