LOONIE’S SAD SONG
Canadian dollar drops below 80 cents (U.S.) as recession already in effect, economists say,
The loonie sank below 80 cents (U.S.) Thursday as a recession looms thanks to contracting oil, gas and mining output amid depressed commodity prices.
The currency closed down 0.35 cents at 79.71 cents Thursday, continuing a record move to the downside over the past two years.
The latest catalyst was strong jobs growth in the U.S., which could strengthen the case for a Federal Reserve rate hike as early as September after Canada cut its benchmark at the start of the year.
Bank of Canada Governor Stephen Poloz could ease the overnight rate even more in mid-July from the current 0.75 per cent after Statistics Canada reported this week that GDP edged down 0.1 per cent in April, the fourth consecutive monthly decline.
According to a note from Bank of America Merrill Lynch economists, the Canadian economy is already in a recession, generally defined as two consecutive quarters of negative growth, having entered the territory in the first three months of 2015.
The note said Canada’s economy will pull back 0.6 per cent in the second quarter after shrinking 0.6 per cent in the first quarter, and forecasts a 70-cent loonie by the end of the year. The currency has already fallen nearly 8 per cent against the U.S dollar since January and is trading below 80 cents for the first time since early June.
While a rate hike in the U.S. would cause the loonie to drift even lower as more investors gravitate to the higher yielding greenback, the currency has also been under renewed pressure from increasing oil inventories and falling crude prices.
Oil advanced Thursday from its lowest level since April, however, after the U.S. said it created more than 200,000 jobs in June for a second straight month .
While the data suggests a moderate pace of growth in the world’s biggest crude-consuming nation, the greenback dipped because the labour report showed wage growth continues to lag behind job creation.
In Canada, consumers and importers face higher costs due to the depreciating loonie, but the positive impact on exports was evident in the latest RBC Canadian Manufacturing Purchasing Managers’ Index.
Published Thursday and based on a monthly survey, the data points to a manufacturing sector recovery as production volumes, new business and employment numbers all ticked up compared to May.
Most regions recorded an improvement in business conditions except Alberta and British Columbia, the survey shows.
Respondents reported stronger export demand from the U.S., where the labour market posted a third straight month of gains after a winter downturn.
“The RBC PMI returned to positive growth territory during June, reflecting the lift to Canada’s manufacturers provided by an improved U.S. economy and a more competitive Canadian dollar,” said RBC senior vice-president and chief economist Craig Wright. “As we move through the summer months, we expect a trend improvement in the level of activity in the manufacturing sector.”