Canada changes tune on loonie's swoon

Global Finance, Mar 2002

With the Canadian dollar, known as the loonie, setting record lows, Canadian finance minister Paul Martin and Bank of Canada governor David Dodge tried to talk their currency up at last month's World Economic Forum in New York.

"While some may denigrate this public relations gambit, we think their effort was long overdue," says Dennis Gartman, editor and publisher of The Gartman Letter, a Virginia-based currency advisory service. "Martin and Dodge understand that perception pays in the world of foreign exchange trading," Gartman says. "And the perception of Canada has been of a nation wholly tied to the commodity cycle, of a nation still torn by the problems of Quebec separatism, and of a nation profligate in its spending policies," he adds.

According to Gartman, Canada made enormous strides in the past several years by running budget surpluses and cutting corporate tax rates, and the fundamentals are changing for the better for the Canadian dollar. If the commodity cycle turns, what then of the Canadian currency, he asks.

Meanwhile, the government is changing its tune on the currency and is no longer denigrating the loonie, Gartman says. "We see this as a tidal change worthy of further consideration," he says.

Lara Rhame of Brown Brothers Harriman in New York says the Canadian dollar still faces some tough sledding, despite its new-found support from the nation's top financial officials. For one thing, global growth prospects don't bode well for commodity currencies, Rhame says."Commodity currency plays are likely to frustrate investors for some time to come, particularly if the US recovery is weak," she says.

A feeble US rebound will constrain Canadian growth in 2002, and the Canadian dollar will have an uphill battle to make gains against the US dollar, Rhame says. Despite a lack of inflation, the Bank of Canada is most likely done cutting rates. With the US Federal Reserve looking like it is done with its rate-cut cycle, and with the extremely weak value of the loonie, the Canadian central bank will want to retain whatever small interest rate differential it has, Rhame says.