MNI INTERVIEW: Dollar Casts Shadow Over Bright Canada Exports

The strength of Canada's dollar is emerging as a major concern for exporters even as they benefit from surging global demand through the pandemic re-opening, the government trade bank's chief economist Peter Hall told MNI Thursday.

While the inability to set up face-to-face meetings is the top risk cited by 35% of firms asked by Export Development Canada, currency fluctuations are now tied for second place at 27% in the agency's semi-annual survey. Concern about the dollar is even more pronounced because worries about the global economy tumbled 9 percentage points in this report while the dollar question nudged up by a point.

"Foreign exchange fluctuations are a big concern," Hall said in a phone interview. "It's the dynamic of the increase that spooks business the most," he said, referring to whether or not the currency goes on a sustained appreciation or surges to historic highs.

Canada's dollar reached the strongest since 2015 this year at around CAD1.20 versus the U.S. currency, which Hall notes is still a far ways away from past rallies that drove the northern dollar to parity. The currency's gain this time is also linked to a commodity boom, though one that appears to be already fading and giving exporters more wiggle room to adjust, Hall said.

FADING COMMODITY RALLY?

"Now we see a bit of softening happening, so maybe they are believing the story more that this is a cycle for commodities, and the chances of getting back to parity are quite remote," Hall said.

"If businesses thought the currency was going to stay roughly where it is right now, they could manage," Hall said. "Demand is overwhelming right now, so the prospect of being able to pass through prices with a currency going up are much greater."

EDC's overall Trade Confidence Index rose a record 19% to the highest level in more than two decades. That jump reflects optimism this re-opening will be more durable than previous rounds as vaccinations roll out, and big U.S. fiscal stimulus that could boost demand for Canadian products, Hall said. Canada sends three-quarters of its exports to the U.S., and some of the biggest categories are commodities and building supplies likely in demand as Congress backs infrastructure projects.

"The prospect of the economy coming back in the second half of the year is that much greater," Hall said. "There is lots of money in bank accounts at the moment, both in business and consumer accounts."