MNI INTERVIEW: Canada Firms Brush Off FX Strength--Export Bank

Canadian firms are resilient to a strengthening currency and focused on bigger hurdles like rebuilding orders lost in the pandemic and U.S. and Chinese protectionism, the federal export bank's deputy chief economist told MNI, a contrast to the central bank's misgivings.

"The questions we ask around the dollar, it doesn't really come up right now as a concern," Stephen Tapp said in an interview Thursday after releasing a semi-annual trade outlook.

Canada's dollar has strengthened from CAD1.45 in March as the pandemic struck and a global crude oil glut drove down the value of the nation's biggest export, recently trading at CAD1.27. That leaves it close to where it started 2020 at CAD1.30.

"No exporters are telling us that the dollar recovery has been problematic," Tapp said. "Even if were to go higher over the next few years as we have in our forecast" by a few cents "that's not going to be the main adjustment exporters have right now," he said.

Bank of Canada Governor Tiff Macklem has added language around the currency's drag on competitiveness in his last two rate decisions, and at a Tuesday press conference said the currency remains on his radar. The Canadian dollar's strength is linked more to a global decline of the greenback rather than a home-grown story, according to Macklem, who has pledged to hold interest rates at 0.25% into 2023 to eliminate slack in the economy.

LESS DRAMA, SAME CHALLENGES

The EDC survey showed top concerns include global demand amid the pandemic and stubborn trade protectionism. Some 53% of firms said they expect a double-dip or "W-shaped" recession, a higher share than the last poll, and two-thirds of firms said the global recession will last more than a year.

Even with a survey done in the weeks before Joe Biden won the U.S. presidential election, 49% of firms said protectionism would worsen over the next year and 41% said it would stay the same. While Donald Trump threatened massive tariffs on Canadian goods and to walk away from the Nafta pact, Biden touted a "Buy American" policy and said he might keep Chinese trade sanctions. China is also sparring with Canada over the arrest of a Huawei executive on an international warrant filed by the U.S.

"The general prevailing view is it's going to be a relatively protectionist or challenging trade environment," Tapp said. "From the Biden administration, we should expect there to be less drama in overall global trade."

EXPORTS HOLDING UP

There was clearer evidence exports are turning around after the first Covid-19 wave. The 53% of firms who saw exports gaining in the next six months is the highest in more than two years, though from the low ebb of the last survey taken around the height of Covid lockdowns.

The overall Trade Confidence Index climbed 21 points to 67.5, leaving it 3 points below where it was before the pandemic.

"Global supply chains have held up pretty well," Tapp said. "It looks like the recovery we see in Canadian trade is going to continue well into the first half of 2021."