Loonie falls below 94 cents US as oil prices continue to drop and weak jobs report

By Eric Shackleton, The Canadian Press

TORONTO - The Canadian dollar fell more than a cent Friday to close under 94 cents US, its lowest level in about a year as falling oil prices, a recovering U.S. greenback and a dismal Canadian employment report dragged the loonie to its biggest weekly plunge in decades.

The loonie closed at 93.69 cents US on currency markets, down 1.28 cents on the day, hitting its lowest level since last August. Some analysts predict the loonie could fall further, especially if world oil price continue to drop.

For the week, the Canadian currency dropped nearly 3.7 cents, a weekly decline that one report said was the biggest since the early 1970s.

Meanwhile, oil prices dove to US$115 a barrel Friday, driven lower by a huge jump in the U.S. dollar, signs of moderating fuel demand around the world and the growing belief in the markets that commodities may have peaked.

That price compared with oil's all-time high above US$147 reached July 11.

In currency markets, the loonie was sideswiped by the surging U.S. dollar, which soared to its highest level against the euro since February over concerns about the deteriorating euro zone economy and a belief that the U.S. economy may improve as oil prices fall.

The fall in the loonie "certainly has been quite a drop ... quite beyond the norm," said Sal Guatieri, BMO Capital Markets senior economist.

Basically, it is going down because the U.S. dollar "is going up against pretty well everything," he said.

"That has a lot to do with the pullback in commodity prices which improves the outlook for the U.S. economy a little bit," he said.

Since Canada is a large net exporter of commodities, he said, "it is getting hit a little more so than some other currencies in recent weeks."

Then, said Guatieri, Friday morning "we had the horrible employment report that cast doubt on the sustainability of Canada's economic expansion."

As to how far will the dollar will fall, "the general sense is the Canadian dollar will weaken over the next year alongside moderating commodity prices," said Guatieri.

"We're looking for it to get to about 90 cents US by the end of next year," he said. "We think it will stay around there, maybe even weaken a bit further."

Aron Gampel, Scotiabank's deputy chief economist, said the loonie has been sliding "quite significantly" over slumping commodity prices. But so have the currencies of Australia and New Zealand, two other so-called commodity countries that like Canada have benefited from the runup in prices of oil, metals, coal, grain and farm goods in the last year.

"We've seen a lot of the commodity based currencies suffer during this period of the sharp reverse of fortunes in the price of many sensitive commodity prices, mainly oil and natural gas," he said

"There's always volatility and this volatility is virtually unprecedented."

For much of the last year, Canada, Australia and other so-called commodity countries have seen their currencies rise sharply because higher prices for oil, coal, metals and grains have made their resources economies among the strongest in the world.

However, there is growing belief that a slowdown in the United States, Europe and Asia will dampen demand for crude oil and other commodities and that's pulling down the commodity currencies.

"More and more investors are coming to the conclusion that this could be a much more protracted economic downturn than had originally been thought," said Gampel.

"Even Southeast Asian economies "are beginning to show some wear and tear around the edges."

In Canada, the national economy lost 55,000 jobs in July, with Quebec and Ontario, the country's two most populous provinces and the centre of the manufacturing sector, the hardest hit.

Statistics Canada said the national unemployment rate improved slightly to 6.1 per cent in July, from 6.2 per cent in June, but only because many people - especially the young - left the workforce.

"At least temporarily this (dollar decline) is a commodity play. Our currency is viewed as a proxy for commodity prices and oil is the bellwether here," said Gampel.

On a purchasing power basis, said Guatieri, a comparison of prices in Canada and the United States "suggests the Canadian dollar should be somewhere in the mid to higher 80s-cent range."

On productivity growth and levels relative to the U.S., it is a similar story "that the currency is overvalued even at current levels," he said.

The Canadian dollar soared to more than $1.10 US earlier this year as currency traders flocked to the loonie amid a slump in the U.S. greenback and solid growth in Canadian GDP, especially in the resources-rich western provinces.

While the loonie's recent decline will make it more expensive for Canadians to take vacations to Disneyland and the sunny U.S. southern states, or import Florida oranges and California grapes, it will also benefit hard-pressed Canadian manufacturers who export to the U.S.

Canadian producers of everything from lumber and newsprint to machinery, plastic products and furniture have been hit hard by the slumping U.S. economy as well as the impact of a high dollar, which has made it more difficult to compete against U.S. and foreign rivals in the key American market.

Some analysts suggest that every five per cent drop in the loonie will add about three per cent growth to corporate profits at Canadian companies.

Gampel said he's "sure not many people are going to be weeping about it. Maybe a lot of importers and cross-border shoppers are sort of crying today."

But many exporters, "who are obviously feeling the pain from the problems of the U.S. are breathing some relief because it will bolster some of their earnings outlook," he said.