Greenback sinking

Continued from FP1

If you wanted to make a case for Canadian exceptionalism, economically speaking, you could. GDP growth has been among the strongest in the developed world; the International Monetary Fund in July revised up its estimate for Canada’s 2017 growth to 2.5 per cent, placing it atop all G7 countries. The Bank of Canada has similarly turned bullish on the economy and hawkish on interest rates, adopting sunnier outlooks for our economic resilience and seemingly hellbent on hiking its overnight rate at least once more this year — an expectation that has helped support the loonie’s flight, too.

Ah, such a tall poppy we are. Now let’s proceed with the chopping.

The fact is, the big, orange, no-doubt-horrifyingto-some reason for the rising Canadian dollar is the President of the United States, his shocking ineffectiveness so far, and the exceedingly low expectations for his effectiveness going forward. If you like the rising loonie, then thank Donald Trump for being Donald Trump.

We can concede the Canadian economy is bouncing back from years of serial disappointment, and that might justify the kind of inflows that support the loonie. But that’s not nearly the whole story, which is as much about the greenback sinking as it is about Canada’s economy going gangbusters.

The U.S. dollar has been sinking against almost every major currency. The U.S. dollar index, which measures against a basket of currencies, has dropped by 9.5 per cent this year, including a 3.8-per-cent drop in the last two months. In 2017, the U.S. dollar has lost ground to the Russian ruble (+1.2 per cent against the greenback), the Chinese yuan (+3.3 per cent), the Japanese yen (+6 per cent), the Indian rupee (+6.7 per cent), and the pound of Great Britain (+7.2 per cent), where economic growth is at its weakest since 2012 and Brexit uncertainty reigns. Mexico has seen its peso rise by 16 per cent against the U.S. dollar, despite its economy being projected to grow by less than two per cent this year.

That is telling. Between Nov. 9, 2016 and mid-January, it fell against the greenback by nearly 17 per cent, as Trump pounded his message of protectionism, tariffs and a big, beautiful wall between the U.S. and Mexico. By and large, he has made “good” on none of those promises, at least not in any way that seems likely to seriously derail the Mexican economy or its place within the free trade zone.

Trump’s brand of America First economics, if he ever followed through on it, would not just punish foreign currencies, but pump up the greenback. Yet it has failed to materialize. With the exception of a tariff on Canadian softwood lumber, the administration is far less protectionist in action than it has been in word. We’ve seen none of the 35- (or 45-, or whatever) per-cent tariffs on foreign imports that Trump threatened; no trade war with China; no border adjustment tax. NAFTA is being renegotiated, not torn up. On trade, the U.S. has been walking loudly, and carrying a little stick.

Trump’s huge promises for domestic spending (remember the trillion-dollar infrastructure program?) have largely evaporated as the White House has mired itself in scandal, infighting, and inertia. That general failure, evidenced by the specific failure to reform health care, has clearly undermined confidence in the direction of the U.S. economy and Trump’s ability to get things done, at least among currency traders. If he founders on Obamacare, how will he manage the budget?

For investors in U.S. equities, of course, this is all fine, for now; a cheap greenback should help corporate earnings. Canadian investors get a mixed bag: a lower U.S. dollar should support higher oil prices, but a stronger loonie is akin to monetary tightening – coming at a time when the Bank of Canada is poised to raise rates. How deep the impact on Canadian stocks ends up being depends on how long the Trump-driven slide in the greenback continues.

As with all things related to the U.S. president, good luck predicting that.