OTTAWA - The Canadian dollar's latest surge is again raising concerns that the soaring currency could restrain economic recovery in the country's manufacturing heartland.
The dollar rose to the highest level since October on Tuesday after adding nearly a cent in value Monday.
Boosted by equally strong oil prices, the loonie flew as high as 96.74 cents US during midday trading, closing up 0.23 at 96.25.
The loonie's recent climb comes at a critical time for Canadian manufacturers, particularly those in Ontario who were hit hardest by the loss of U.S. markets during the economic downturn.
Canadian exporters have been hoping to get a major boost from a resurgence in U.S. factories, but a stronger loonie and weaker U.S. dollar will make their products less competitive.
"Exporters in Canada trying to sell stuff other than crude oil will find their goods increasingly uncompetitive in the United States," noted Carl Weinberg, chief economist with U.S.-based High Frequency Economics.
"The death toll amongst Canadian exporters will rise until oil prices and the loonie turn the corner."
Once an exporter closes its doors, "it does not spring to life if the Canadian dollar starts to go the other way," Weinberg added.
Bank of Canada governor Mark Carney began warning as far back as last summer that the dollar's strength could derail the recovery. He expanded the caution in October, declaring that it had already likely "more than fully offset the favourable (economic) developments since July."
Most analysts believe the currency's fundamental value is about 85 cents US, but they also forecast it will break through parity sometime this spring.
For manufacturers, the loonie's volatility-- it was as low as 76.55 cents last March -- presents as much a challenge as does its absolute strength.
Most Canadian exporters have already factored in a dollar at parity in their operations, as painful as that is, says Jayson Myers, president of the Canadian Manufacturers and Exporters group.
Equally, or even more pressing, is that the U.S. manufacturing sector has used the recession to restructure by consolidating production and supplies within the domestic market, shutting out Canadian partners. Many Canadian branch plants have been repatriated stateside.
As well, the U.S. market is less accessible because of border restrictions and legislation such as Buy America clauses in stimulus spending.
"The dollar is manageable, these other issues are not," Myers said.
Tuesday brought more evidence that U.S. factories are swinging back to action after a report Monday that a much-watched manufacturing index rose to its highest level in three years. The new reports showed that growth in inventories and new orders last month was double consensus expectations.
The December production spike reflected by the two reports suggests U.S. economic growth could hit six to eight per cent annualized in the fourth quarter of 2009, said Derek Holt of Scotia Capital. That's about twice the growth rate anticipated for Canada.
Under normal circumstances, Canadian manufacturers and exporters would be expected to be carried along, given the seamless integration of production on both sides of the border. About 30 per cent of Canadian manufacturing exports are intra-company.
Some of the growth in the U.S. will rub off on Canada no matter the dollar or restructuring, economists say. But not as much as might otherwise be the case.
"Our hope is the U.S. GDP growth rate and the speed of the recovery in production will be so strong that it will help offset the impact of a rising Canadian dollar," Holt said.
Myers said that if all goes well, Canadian manufacturers could see a double-digit growth rate this year, but coming off a 30 per cent contraction from the fall of 2008, that is still well below capacity.
The strong loonie is helping in one area -- the government's ability to attract investors for its bonds.
Ottawa announced Tuesday morning it will float a second global bond issue in the near future, this time in the euro denomination. In September, it raised US$3 billion with a U.S.-dollar bond issue.
"I think there will be a ready market for Canada's debt," said TD Bank chief economist Don Drummond. "We're staggered by hearing $56-billion deficits (by Ottawa), but we're looking pretty good compared to everybody else."
