How to rein in the loonie

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March 10 was the day the CEO of Citibank announced his bank was profitable again, igniting a global rally that's boosted stock markets by 50 per cent or more. Unfortunately, it was also the day the loonie began what has become the fastest, biggest upswing in its history.

From 77 cents (U.S.) in March, the loonie has rocketed up 25 per cent, touching almost 96 cents by Friday. It won't be long before our loonie is worth more than the U.S. greenback. That may cause a certain nostalgic smugness among some old-timers (who remember when "a dollar was a dollar"). But it's unequivocally bad news for our economy.

Fair value for our currency, based on purchasing power, is in the low 80s (U.S.). So Canadian-made products are already artificially overpriced by 20 per cent; that will get worse in the months ahead. No wonder Canadian exports, stagnant for years, have plunged another 10 per cent this year. Statistics Canada announced Friday that our monthly trade deficit reached $2-billion in August -- the worst on record. On that basis, the loonie should be sinking, not flying.

How do we explain this takeoff? It certainly has nothing to do with fundamentals, the real factors economists used to think determined exchange rates (like competitiveness, trade performance, productivity). Our international trade performance has never been worse. All our exports (other than oil and minerals) are losing customers. And our productivity growth is negative. No, it's a massive financial mood swing, not economic reality, that explains the loonie's rocketing ascent.

It's cold comfort to note that part of the problem is U.S. dollar weakness (not just the loonie's strength). Yes, other currencies are also rising against the greenback -- but ours is rising faster. Since March, the loonie has soared twice as much as the yen, and half again as much as the euro. Yet we are far more dependent on exports to the U.S. than Asia or Europe. Mexico is the other economy integrally tied to the U.S., yet its peso has gone nowhere this year. So we are being priced out of all markets, global and North American.

Bank of Canada Governor Mark Carney agrees the loonie is threatening our recovery. But how do we bring it back to earth? Mr. Carney tried jawboning the dollar down, with half-hearted results. Pledging to keep interest rates near zero, and finding other ways to boost money supply and prices, would help. But that ignores the source of the problem: financial speculators using our currency to bet on the future escalation of oil prices.

That's why we've got to rethink the fundamental direction of our economic and energy strategies. Canada has as much oil as Saudi Arabia. Yet we're the only major oil exporter in the world with a completely hands-off approach to managing the ownership, development and export of this resource. That's what's sparked such obsession among global financiers in our mineral resources -- which, after all, account for only a couple of percentage points of our GDP.

So to rein in the loonie, we must rein in the oil export juggernaut that is squeezing out all other exports. Use environmental and planning approvals to slow down new development. Tax petroleum profits. Above all, reimpose sensible limits on foreign takeovers of resource assets. All that would cool off the loonie in no time.

Even deeper, we'll want to rethink all that power we've given hot-money traders over this most important price. They have too much to play with, making unproductive bets on asset prices -- meanwhile, our economy gets dragged along for the ride. Regulating hedge funds and other speculators (constraining their funds, and regulating what they're allowed to do with them) would restore some stability and rationality to foreign exchange markets.

Finally, here's how to seal the deal. Appoint me as the next Bank of Canada governor. That'd knock 25 cents off the loonie overnight.

Jim Stanford is an economist with the CAW.

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