Jeff Rubin sees US$1.05 for a Loonie
If you are a tech firm, think about what this CIBC prediction will do for your business:
“A Nickel Back
by Jeff Rubin
While it’s been three decades since Canadians have seen their currency at par with the once
almighty US dollar, the loonie’s flight is far from over. By the end of next year you’ll get
as much as a nickel back when you trade your loonies for greenbacks, the biggest
premium since 1960. A similar if not more dramatic story is being told in housing prices. US prices continue to fall on mounting foreclosures, while Canadian housing prices continue to rise
on a surging domestic economy. And for the fourth year in a row, the resource based TSX is set to outperform the S&P 500. Across a wide spectrum of assets, the tables have suddenly turned. Canadians are getting richer compared to their American neighbours, after having fallen so far behind during the IT-driven economy of the 1990s.
At the heart of this reversal of fortune is the huge shift in the global terms of trade over
the last decade, which has seen economic value-added migrate from information technology back to resource rents under the ground. Nowhere is that shift more evident than when comparing soaring crude oil prices against stagnant or plunging technology prices. It takes only a third as many barrels of oil to buy a basic computer as it did at the start of the decade, when Silicon Valley drove the world economy.
Today it’s not Russian or Mexican defaults that de-stabilize global credit markets, but defaults by homeowners deep inside the American heartland. The American economy has gone from the global engine of growth to the world economy’s Achilles heel in the space of a decade. In the past, weakness in the American economy would spill over the border in a hurry, particularly when a par Canadian dollar exchange rate left exporters fully exposed. But with the developing world, not the US, now driving global resource demand, the umbilical cord that has always
connected the Canadian economy to the much larger American market is being severed. That’s already apparent in the very fact that Canadian real GDP growth will surpass the US in a year when the Canadian dollar appreciated from 85 cents to parity.
And growth is likely to remain stronger in Canada next year as well, despite a premium
Where the umbilical cord still remains, US economic weakness has been transmitted to the Canadian economy. But the once critical manufacturing nexus that connected the two economies is becoming increasingly marginalized in Canada, as it is in the US as well. Both the auto and forestry sectors are feeling the full brunt of a US economic slowdown, but the losses in manufacturing are being readily offset in today’s economy.
Just as the loss of the once mighty trade surplus in motor vehicles and parts no longer matters in today’s resource dominated trade flows, nor does the recent loss of almost 300,000 manufacturing jobs show up in a three decade low national unemployment rate. In fact, once
measurement differences are accounted for, Canada’s jobless rate will fall as low as the US rate next year for the first time since 1982. Nor have plant closures managed to shut down the pace of economic growth, even though manufacturing output is approaching its lowest share of
GDP in the post-war period.
Soaring Energy Rents Inflate Domestic Incomes
The terms of trade will continue to dictate a stunning reversal of fortune between Canada and the US, with rising resource rents continuing to swell corporate earnings, personal incomes and government tax revenue. With consumer spending, business investment and government spending all well financed, the domestic economy will be firing on all cylinders.
A much stronger domestic economy north of the border will in turn translate into divergent monetary policies in the two countries, with the Federal Reserve Board following through with another 50 bps of easing while the Bank of Canada remains on the sidelines. With interest rate spreads turning against the greenback and commodity prices buoyant, the Canadian dollar
should climb to a 5% premium against the US dollar by the end of 2008.
TSX: Greater Leverage to Resource-Consuming Economies Than to US
Just as the Canadian economy is delinking from the cyclical rhythms of its much larger neighbour, so too are the fortunes of the TSX. Strength in energy, base metals and gold prices should drive the TSX to the 16,200 level by the end of 2008, providing the fifth consecutive year of double-digit total returns. Soaring crude demand outside of the OECD, particularly among OPEC countries themselves, should push WTI to as high as US$100 per barrel by the fourth quarter of next year, as rapidly growing domestic consumption in many major oil-producing countries begins to cannibalize export capacity.
Meanwhile base metal prices seem poised to hit new highs, with global growth set to post another near-5% year. With 45% of the market capitalization in energy and materials, and only 14% in non-resource manufacturing, the TSX provides a lot more leverage to the soaring
economies of Russia, China and India than it does to a clearly sick and troubled US economy.”