Here is another article that touches on what I mean. Canada cannot do well without the mighty American consumer. There will be corrections but Canada is fighting a losing battle. USD/CAD at 1.25 in 4-5 months is my call.
Dodge May Delay Rate Cut as Lower Dollar Aids Exports (Update1)
By Greg Quinn
Jan. 15 (Bloomberg) -- Bank of Canada Governor David Dodge may have less need to trim interest rates because the Canadian dollar's slide is helping the exports that make up more than a third of the country's economy.
Dodge and his colleagues on the bank's Governing Council, who are forecast to keep rates unchanged tomorrow, are likely to delay a reduction hinted at only last month, futures trading suggests. Economists now predict any cut, which would be the first since April 2004, won't happen before the third quarter.
The Canadian dollar's descent to a 13-month low and the accompanying export spurt may help manufacturers recover after their production declined for most of 2006 and threatened to stunt economic growth into this year. The dollar is the worst- performing major currency against its U.S. counterpart in the past three months, losing 3 percent.
``There is a less pressing need to cut rates,'' said Carolyn Kwan, an economist at Scotia Capital Inc. in Toronto and a former Bank of Canada researcher. ``The export sector will certainly benefit from a Canadian dollar that has been depreciating.''
The currency, which reached a 28-year high in May, has retreated as the price of crude oil and natural gas tumbled. Canada, which sits on the biggest pool of oil reserves outside the Middle East, is the world's third-largest producer of natural gas.
Policy makers, who have kept the benchmark lending rate at 4.25 percent since May, will do so again tomorrow, according to the median forecast of 26 economists in a Bloomberg News survey.
End of Tightening
Prior to May, the central bank pushed rates higher at seven consecutive meetings. Dodge said the tightening was necessary to control inflation amid record shipments of energy and metals. The bank's announcement tomorrow is at 9 a.m. in Ottawa.
Dodge signaled during a Dec. 11 press conference in Toronto that he was considering a reduction, saying a slowdown in Canada and the U.S. -- Canadian exporters' biggest market -- was lasting longer than he anticipated.
The world's eighth-largest economy shrank in September and failed to grow in October, as factory output declined for the ninth month of 2006, Statistics Canada said. Canadian manufacturers export half their production, mainly to the U.S. Retail sales, a strong point for most of last year, declined in both months.
``A couple of weeks ago we thought the Bank might be cutting rates say in the second quarter,'' said Dale Orr, Toronto-based managing director of Canadian research for Global Insight Inc., an economic forecasting firm. ``We have now withdrawn that.''
Futures
Trading in futures contracts tied to the Bank of Canada's main rate shows speculation about a reduction is ebbing. The yield on the December bankers' acceptance contract on the Montreal Exchange has risen to 4.19 percent, approaching the central bank's current rate, up from 3.74 percent on Dec. 1.
Still, most economists say exports can't rebound fast enough to stave off an eventual cut. Policy makers will ease in the third quarter, according to the median of 12 estimates in a Bloomberg survey taken Jan. 2-8.
There are already signs of a turnaround. The trade surplus widened more than expected in November, soaring 24 percent from the prior month, and exports to the U.S. jumped 3.6 percent. Factories hired 10,100 workers in December out of 61,600 new jobs; the jobless rate matched a 31-year low of 6.1 percent.
`Bottom Line'
``Every one cent U.S. change in the U.S. dollar is about C$19 million on our bottom line,'' said Rodger Hutchinson, corporate controller at Vancouver-based West Fraser Timber Co., North America's third-largest lumber producer, in an interview.
The Canadian dollar rose to 85.63 U.S. cents at 9:30 a.m. in Toronto today, from 85.43 cents on Jan. 12. The currency touched 84.75 U.S. cents on Jan. 11, the weakest since Nov. 22, 2005.
Car manufacturers, whose exports fell for several months last year, increased sales in the U.S. and elsewhere overseas by 5.4 percent in November.
Dodge, 63, hasn't speculated on how the lower dollar may be affecting factories or other sectors of the economy.
``We've had some weakening of resource prices, so it's not totally surprising that there will be some weakening of the Canadian dollar,'' he said Jan. 7 in Switzerland.
Jeremy Harrison, a spokesman for the central bank, declined to comment. Dodge's next opportunity after tomorrow will be Jan. 18, when he releases an economic forecast.
Obstacles
Some economists warn Canada's economy still faces obstacles that will force a rate cut this year.
Warren Lovely, an economist at CIBC World Markets Inc. in Toronto, noted that ``very little real economic growth'' has accompanied Canada's job growth. He predicts the economy will expand at a 2.4 percent annual rate this quarter, slower than the 3.6 percent pace a year earlier. There's still a need to ease, ``and not just a token amount,'' he said.
Most economists predict a cut won't come soon though, especially if the dollar weakens further.
``If the currency continues to drop, the argument for a rate cut weakens,'' said Doug Porter, an economist at BMO Capital Markets Corp. in Toronto. The dollar ``is rapidly getting back into an area that I would call comfortable for a lot of manufacturing.''
