Businesses and investors will have to start adjusting to the reality of a stronger Canadian dollar, TD Bank said in a study released Tuesday.
The bank argues that there’s nothing unusual about the current value of the Canadian dollar, and that, ultimately, the strong dollar will benefit the economy.
With the Canadian dollar in position for further appreciation this year, businesses will have to budget for its higher value in their planning, TD chief economist Don Drummond said.
“The loonie’s massive appreciation has really put Canadian businesses and investors on the spot,” Drummond said.
“Not only are the dollar’s gains here to stay, but there is further upside potential for this year – which means that businesses and investors will need to put the loonie left, right and centre in their financial plans.”
The dollar, which rose about 20% in value last year against the U.S. dollar, was trading above US75¢ today.
The bank report said Canadian businesses can still be competitive at the current exchange rate and that over the long haul, the economy can reap important benefits from the currency’s gains.
“Adjusting to the reality of a stronger dollar will require a new mindset on the part of Canada’s business community, one that will require a much tighter focus on competitiveness,” Drummond said.
“Investors will have to put more weight on exchange-rate considerations in their decision tool kits as well,” he added.
TD expects the loonie to continue to gain ground in 2004, ending the year at US79¢. It predicts that the dollar will likely trade within a wide range, from US74¢ to US82¢.
TD economists expect the loonie’s gains to continue to weigh both on economic growth and inflation over the next few quarters.
“The currency’s appreciation is likely to shave about two full percentage points off GDP growth in 2004,” Drummond said.
“Had the loonie remained at US63¢, the combination of strong U.S. growth, mega-low interest rates, and rising commodity prices would have amounted to GDP growth of close to 5%.”
“Instead, Canadian economic growth will come in below the 3% bar this year.”
TD predicts that the Bank of Canada will cut its policy rate on March 2. “The Bank of Canada’s interest-rate policy beyond that point will depend on incoming indicators of economic growth and inflation. If the data are consistent with the latest Bank of Canada forecasts — which are uncannily similar to those of TD Economics — we expect that the Bank will then be on hold until late 2004, at which point they will gradually start to move interest rates higher.