In mid-December, when the Canadian dollar was sliding against all major currencies, some commentary on its relative strength turned glum–despite the fact that resource-rich Canada is still the only G7 nation with trade and fiscal surpluses. Negative Nellies insisted investors are no longer starry-eyed for Canada now that oil prices have retreated and the income trust party has ended. This logic generated introverted headlines like: “Has the dollar had its day?” That, of course, is the right question. But the subject should be U.S. bills, not coins backed by Ottawa.
Central bankers around the world fear what they call “possible disorderly developments owing to global imbalances”–a.k.a., a sudden run on the greenback. “We have a saying in Scandinavia,” notes Hans Martens, head of the European Policy Centre. “When you pee in your pants, it gets warm for a while, then it gets RFC”– really effing cold. The question on every money manager's mind, he adds, is about the level of market willingness to put up with American overspending. Simply put, the U.S. dollar is like Nortel stock back in the day–it is vastly overvalued, but with trillions in dollar-denominated assets floating around, key investors like China have an interest in putting doomsday off. Still, the world is slowly diversifying, which is why most major non-U.S. currencies have been rising. The Canadian dollar's problem is that other currencies such as the euro are becoming more attractive. After all, in currency terms, you are only as good as your last interest rate hike, and unlike the eurozone, rates in Canada are on hold.
The question is what happens if U.S. interest rates are cut, forcing more greenback investors to start looking for a new home. The honest answer is: “The loonie will go up or down.”
The concern, as always, is how fast.