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From the continuing slide of the Canadian dollar to the volatility of the global markets and the plunging of the TSX, many are wondering when there will be good news for the economy.

Professor Angelo Melino, RBC Chair of Economics and Public Policy, says it’s hard to predict just how low the loonie will go. But he warns recovery isn’t just around the corner.

“If you’re trying to decide whether to take a vacation in the Caribbean or stay home and go tobogganing or skiing, the lower value of the Canadian dollar suggests more vacations at home make sense this year,” says Melino, a professor at the University of Toronto Mississauga. “You may also want to eat more apples than bananas.

“And no cauliflower either – they’ve been extremely expensive this week.”

�Թϱ��� writer Noreen Ahmed-Ullah asked Melino about the pain we’re feeling now and the pain still to come.

Why is the dollar dropping?

There’s been a very sharp decline in the price of oil in the last six weeks, and that’s the main factor behind the decline of the dollar. Oil is still a pretty important part of our export bundle, the things that we sell to the rest of the world. The decline in the price of oil has gone from about $42 in late November to below $30. 

There are other things at work because other commodity prices are also in decline. It reflects the slowdown in China – a shift in China from manufacturing towards more domestic production of services in particular. It also reflects some expectations that the Bank of Canada is likely to be more dovish and maybe even cut at the next meeting or the meeting after that, whereas the Federal Reserve is more likely to be raising interest rates this year, so the divergence in interest rate paths are also important. But the most important factor is the price of oil. 

It’s affecting all kinds of oil producers like Russia. But a large fraction of our exports is energy exports and a large fraction of that is oil.

How much further will the dollar fall?

We don’t know. We just know it’s fallen quite a bit. It’s much lower than traditional benchmarks would suggest. When prices start declining very quickly, they tend to overshoot. 

I don’t know where the bottom is going to be. We can be confident that wherever the Canadian dollar ends up a few months from now, we will have gone below that for awhile before it gets back up. I just know that it will drop too far before it corrects. 

There are all kinds of predictions. I think I saw one today that said it could go to 57 cents or something. In the past, 61½ cents is where we got to in 2001. We haven’t been there for a long time. Some people are saying that we’re going to go back to revisit those days. It’s very hard to predict that, for what it’s worth.

How can the dollar recover?

What we need is a transition of resources out of the energy sector and into either the import-competing or exporting sector. The slow dollar will be around until that happens. 

Now, this could take a long time. For example, in the last 15 years we’ve lost a lot of the productive capacity in our automobile industry. It’s gone to Mexico and we don’t see it coming back at current exchange rate levels. 

But other businesses will be starting up and creating capacity, producing goods and services for export and import competition. As that happens, we can see the Canadian dollar getting better.

That’s years away. Is there no hope for the dollar recovering over the next few months?

No. What can happen within months is a shock to the oil markets – a war in the Middle East or some sort of political disruption. That can happen very, very quickly and affect the price of oil, but that’s not something we want. It’s not something that policy should be trying to do!

Will an economic stimulus from Ottawa help the dollar recover?

That helps speed up the transition, but we are still talking years, maybe two years instead of five years. There’s a variety of things they could do. They could cut taxes and let people decide what industries should be supported. They could be investing in infrastructure – roads, airports, pipelines and the like. They might decide to invest in universities and hospitals. When you have very low interest rates, there are many opportunities out there for government that are attractive as investments.

What should members of the public do?

Timing the movements of the Canadian dollar is a very tough game. But if you’re trying to decide whether to take a vacation in the Caribbean or stay home and go tobogganing or skiing, the lower value of the Canadian dollar suggests more vacations at home make sense this year. You may also want to eat more apples than bananas. And no cauliflower either – they’ve been extremely expensive this week. 

My advice is assume today’s exchange rate is what it’s going to be for the foreseeable future. I expect it will be higher five years from now, but five years is a long time away. Instead of speculating on exchange rates, make your decisions given the prices you’re facing. If you’re deciding whether or not to shop in Buffalo or Toronto, look at what the prices are now, and that informs what you should be doing. If you’re looking at the prices of imported goods versus domestically produced goods, you should take that into account in making your decisions. I’m not going to recommend that people go out there and speculate on the path of the Canadian dollar.

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