Canadian exporters are being hit with the double whammy of a slowing U.S. economy and a persistently strong loonie, according to a new report from CIBC World Markets.

Traditionally, when American markets turn soft, commodity prices drop and so does the value of the loonie, providing an automatic stabilizer that has buffered the roughly-one-third of Canada’s GDP that is exported to the U.S. However, with the American economy having decreasing impact on global commodity prices, it no longer appears that the loonie will move to the cyclical rhythms of the giant U.S. marketplace.

“Even as economists busily ratchet down their forecasts of U.S. growth next year, the Canadian dollar has remained amazingly firm, holding near the 90-cent level,” said Jeff Rubin, chief economist and chief strategist, CIBC World Markets. “The combination of a sticky exchange rate, hovering near a 28-year high, and a retrenching American consumer has the potential to turn a mid-cycle slowdown in the U.S. economy into something a lot uglier than that north of the border.

“That’s a particular worry for Ontario, which as home to the largest share of North American auto production, must be on the front line of any downward adjustment in big ticket spending by the American consumer.”

A slowdown in the U.S. economy usually brings at least some offset to Canada by weakening the Canadian dollar. Either Canada’s terms of trade worsen as a result of the impact of slower U.S. economic growth on global commodity markets, or the Canadian dollar just gets thrown out with the bath water as capital flows quickly reverse out of North American markets. Either way, the loonie usually starts sinking when U.S. economic prospects turn south. For Canadian exporters, a weakening exchange rate is a lifeline in rough times.

What’s different today is not so much a new dynamic to the Canadian dollar but a different role for the American economy. During the 1990s, a powerhouse U.S. was the engine that drove the global economic bus, routinely accounting for 30% of global GDP growth. Today, it accounts for half that much, and far less than that when it comes to global demand for most commodities. The end result is that commodity markets levered to global growth are not nearly as vulnerable to a U.S. economic slowdown as they once were. While there are exceptions, most commodity markets reflect global, not continental, demand.

“If commodity prices don’t fall, and fall steeply, it will be up to the Bank of Canada’s interest rate settings to bring the Canadian dollar down,” noted Rubin.

Natural gas appears to be an exception to most Canadian commodity markets in its vulnerability to changes in the U.S. market, since natural gas trades within the confines of North America. After setting seasonal records following hurricanes Katrina and Rita last fall, U.S. natural gas hub prices have recently set multi-year lows, with the benchmark Henry Hub spot falling to as low as US$3.63/MnBtu.

The turnaround in Canadian prices has been equally striking, with Alberta hub prices tumbling 75% or so from last December’s US$13/MnBtu peak. A sustained pullback of this magnitude will pare billions of dollars from industry cash flow. Futures traders are likely banking on a normally cold winter to buoy demand and cut high inventories, bets that could prove misplaced, given the atypically mild weather patterns of recent years.

The report noted that in energy equivalent terms, natural gas prices have fallen from a 50% premium to oil last winter to a 50% discount to oil prices today. As a result, CIBC World Markets has cut its average natural gas price forecast for next year by almost a half to between US$6.50- $7.00/MnBtu, well below what is currently priced into the strip curve.