Loonie Rout Deepens

[Jack]

The Canadian dollar plunged another US2.69¢ yesterday, the victim of a global commodities crash that is leaving an ever-widening trail of destruction in its wake. While the credit crisis has left the global banking system teetering and the stock-market crash has crushed investor portfolios, the slide in commodity prices is having even more far-reaching effects on everything from currencies to government balance sheets to geopolitics. "A stock-market crunch is a wealth issue but a commodity crunch is an income issue," said David Wolf, Canadian economist at Merrill Lynch in Toronto. "It`s one thing to say my portfolio for retirement 20 years from now isn`t quite what I wanted," Wolf said. "It`s another thing to say well I got 10% off my paycheque, because essentially what we`re talking about is a significant chunk off the national paycheque. That means belts are going to have to be tightened -- governments, companies, consumers. The whole whack." The loonie ended the day at US79.70¢, down more than 25% from its record high above US$1.10 last November. The currency has been sideswiped by the rush into safe-haven US greenbacks but, more importantly, the dramatic plunge in commodity prices since the summer. Oil fell another 7% yesterday to settle at US$66.75 a barrel, down nearly 55% from its high above US$147 in July. Some analysts see the drop in crude and the loonie reaching a near-term trough. "With crude now in the US$60 region, production cuts by OPEC are certain and should cause at least a temporary bounce," said Andrew Pyle, a wealth advisor at ScotiaMcLeod. "Other commodities could follow, but the real stretch marks are showing in the US dollar, which is now in defiance of gravity and fundamentals. A snap would also support a rebound in commodities, which is why the fallout in the [Canadian dollar] could be coming to an end." Other analysts say both commodity prices and the loonie have further to fall amid what could be the worst global recession since the mid-1970s. "It`s quite clear anecdotally Chinese demand for commodities is falling and falling significantly," said Dwyfor Evans, senior strategist at State Street Global Markets, in Toronto yesterday from Hong Kong. "Another thing we`re hearing as well is production and manufacturing in China is also slowing to the extent that factories are closing down and factories are being rationed. If China was the marginal importer of commodities for the past two to three years that source of demand for commodities is basically gone." Dwyfor believes oil could fall another US$10 quickly and is forecasting the loonie to drop into the 70¢ to 75¢ range through to the end of the year.

(National Post 081023)