MNI INTERVIEW: Limited Energy Lift Keeps CAD Under Strain-EDC

Canada's dollar will remain weighed down next year by the global flight to U.S. dollars and limited ability to boost energy production in response to high prices, the federal trade financing bank's chief economist told MNI.

“There’s a whole host of forces that are pushing and pulling on the loonie,” Export Development Canada's Stuart Bergman said on MNI's FedSpeak podcast, referring to the bird depicted on Canada's one-dollar coin.

While the currency might have strengthened 3 U.S. cents for every USD10 a barrel rise in crude oil in recent past, that relationship is wilting, he said. Canada's dollar is seeing some traditional support from higher prices on other commodity exports like food, he said, but that's more than offset by U.S. dollar global strength.

Canada's dollar will lose another 3 U.S. cents next year to average about CAD1.33 according to Stuart's forecast, adding to a 4 cent loss last year. That depreciation in 2023 would repeat the pattern of a Canadian dollar weakening against the greenback but remaining firm relative to other currencies such as the pound and the yen, reflecting the various paths of central bank tightening in response to inflation.

FED LOCKSTEP NOT ENOUGH

“The Bank of Canada will likely remain in lockstep with the Fed, versus some other central banks who may have a harder time keeping pace,” Bergman said.

The Canadian and U.S. economies will slow next year but avoid recession, unlike the eurozone, thanks to North American consumers who still have a pile of cash saved up from Covid relief checks, he said.

Europe's struggles with energy supplies and the Ukraine war mean it's already in recession and the global economy is also teetering, he said. “The bike is moving really slowly, it’s still upright but it’s kind of wobbly and even just the tiniest pebble can cause it to tip over. The problem is that the path ahead is absolutely littered with pebbles.”

Bergman's view that Canada avoids recession is more optimistic than commercial banks such as RBC and Desjardins, and he admits it's a close call in a world where central banks have few good options. EDC recently cut Canada's 2023 growth forecast by 0.8pp to 1.3%.

PIPELINE STRAIN

Canada's weaker dollar will support exports and the country's growth, but the idea of another oil boom as Europe seeks to displace Russian supplies is unlikely, Bergman suggested. The continent needs 2.2 million barrels a day of crude oil and Canada has so far committed to an additional 200k, and it's a similar story for natural gas.

“Even if we could ramp up production, the issue is that our ability to export that additional capacity remains constrained by our export infrastructure,” he said. Most production today is sent to the U.S. and that makes shipments on to Europe more expensive at a time when climate rules are also boosting costs.

“There are opportunities for Canada to provide more oil and gas to Europe over the medium term, but again, this would take the right form of investments and even then would be limited relative to other swing producers like OPEC+ and the United States,” he said.