Loonie hits turbulence, drops as much as 2.18 cents US
TORONTO - The Canadian dollar took another dive Thursday, falling by more than two cents at one point to its lowest level in more than 13 months.
Market watchers couldn't point to a single factor to account for the big drop, which occurred just before midday Thursday, but said several factors have pushed the loonie down for more than a week.
The loonie recovered some of the lost altitude later in the day, but ended North American trading at 87.28 cents US.
That's down 1.78 cents US from Wednesday and down nearly seven cents or 7.1 per cent since the end of September, when the dollar closed at 93.97 cents US.
The Canadian dollar also fell Thursday against the euro, pound and yen.
Sacha Tihani, a currency strategist at Scotia Capital, said recent comments by Finance Minister Jim Flaherty and the Bank of Canada has taken away some of the focus on weakness in the U.S. and Europe.
"This has brought back to people's minds that Canada is heading for a downturn, most likely, and the currency is reflecting that," Tihani said.
If the loonie stays at current levels it will make imports of everything from Florida fruit and California vegetables more expensive to Canadian consumers and raise the costs of winter vacations to the United States.
But it will also provide some relief to hard-pressed Canadian manufacturers, which have been squeezed for the last two years as the loonie rose on currency markets, making exports of lumber, newsprint, machinery, furniture and other products more costly in the United States market.
The loonie had been down more than two cents U.S. against the American dollar Thursday morning, trading as low as 86.88 cents U.S. That's the lowest since Sept. 4, 2007.
The Canadian dollar's strength a year ago was partly due to rising oil prices and also to foreign takeovers of Canadian resource companies, which helped support demand for the loonie, Tihani said.
"You'll notice that's one factor that has been absent, I guess, throughout this year owing to the credit crunch and things like that," Tihani said.
In fact, a potential $7.8-billion hostile takeover of Calgary-based power generator TransAlta Corp. (TSX:TA), was formally called off Thursday the two U.S. private equity firms that had sought to buy it.
There are also persistent concerns that the biggest corporate takeover in Canadian history, the $52-billion deal to purchase of BCE Inc. (TSX:BCE), could be derailed by financing issues before it closes.
Light, sweet crude for November delivery fell $1.81 to settle at $86.62 a barrel on the New York Mercantile Exchange on Thursday, the lowest closing price since Oct. 15, 2007. In aftermarket trading, prices edged below $85, a key technical level that traders say could signal another plunge.
"I think we're seeing a perfect storm hit the Canadian dollar," David Watt, senior currency strategist at RBC Capital Markets, said Thursday.
"You had stories in the news about Canadian banks having some liquidity issues and any time your financial system is in the news nowadays, your currency is getting pressured," Watt said.
So far, most observers have said Canada's banks are among the strongest in the world and weathering the financial tempest relatively well because of their historically conservative attitude to risk.
However, most observers and the banks themselves have said they cannot emerge completely unscathed by the global economic slowdown and a likely recession in the United States.
The currency is also being sideswiped by rising demand for the U.S. dollar as the United States government tries to borrow heavily in global money markets to finance its US$700-billion bailout of Wall Street banks.
Finance Minister Jim Flaherty told a news conference Thursday that Canada's financial system will not require a bailout since it is fundamentally strong.
"We are not looking at a rescue package for banks, we are not looking at a bailout for banks, we are not looking at creating any additional risk for taxpayers' money in Canada by bailing out banks."
Watt also noted that the International Monetary Fund's latest world outlook, released Wednesday, is calling for global economic growth of just three per cent - the lowest since 2002 - down from five per cent last year and a projected 3.9 per cent in 2008.
"The global economic outlook is deteriorating quite sharply and it's hitting a lot of currencies especially the Canadian dollar," Watt said.
"The IMF is calling for all but a global recession over 2009 and, if anything, their commentary is even more bearish than that."
But the same report said Canada's economy would see among the strongest growth this year and next, compared with other developed countries.
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