The Vancouver Sun ~ Everything but tourists heading south

Stocks, oil, Canadian dollar continue to plunge

Eric Beauchesne, Canwest News Service

Published: Wednesday, October 22, 2008

OTTAWA - Virtually everything, except perhaps Canadian tourists, headed south on Wednesday.

The Canadian dollar plunged more than two cents to a three-year low below 80 cents US, oil sank more than $5 US a barrel to a 16-month low of less than $67, and Bay Street’s benchmark stock index fell more than 550 points amid spreading fears of a global recession and more bad news on the domestic economy.

"The Canadian dollar has broken so many technical levels the last few weeks, and we are touching a level that many, including me, would have thought unreachable in 2008," noted Tyson Wright, senior foreign exchange trader at Custom House, a Victoria-based international payments firm.

Traders work on the floor of the New York Stock Exchange on Wednesday. Stocks continued to stumble amid news that leading economic indicators and retail sales have also fallen.

The dollar, after hitting a low of 79.37 cents US, closed at 79.7 cents US, down 2.69 cents US from Tuesday’s 82.39 cents US, and its lowest close since June 2005.

"It is true that the economy is probably in better shape than those of the U.K. and Europe, Australia and New Zealand, but with oil’s decline and a slowing U.S., the loonie has fallen out of favour," Tyson said.

Oil prices closed at $66.75 US a barrel, down $5.43.

"We do believe that the Canadian dollar is oversold, but the question remains when will it correct back," Tyson said.

The steep plunge in the currency from near parity last winter, as well as making imports more costly, will make it much more expensive to head south this year. With winter rapidly approaching, that’s a chilling prospect for Canadian snowbirds, especially those whose investment savings have also been deeply eroded by the plunge in the stock market.

And Scotia Capital foreign exchange analyst Steve Malyon warned that a quick recovery in the Canadian dollar is "not necessarily" in the cards, adding that the weakness reflects the slump in world oil prices, a weakening global economy and possibly some catch-up by the U.S. dollar.

"Recall that the Canadian dollar was exceptionally resilient in the third quarter - it fell only four per cent against the U.S. dollar and was the second strongest G10 currency after the Japanese yen - while other commodity currencies fell abruptly."

Adding to the downdraft in the dollar and the stock market were Statistics Canada reports that its index of leading economic indicators slipped 0.2 per cent, ending five-straight months of gains, signalling further weakness over the next few months in the already struggling economy.

And retail sales in August - and even before the latest financial crisis erupted - fell 0.3 per cent, their first monthly drop in half a year.

"There’s little doubt domestic demand is slowing," said BMO Capital Markets analyst Benjamin Reitzes, noting that sales are on track to post their first quarterly decline in six years. "With the credit crisis flaring up again in September, prompting a steep drop in the TSX and consumer confidence, the outlook for sales doesn’t look good."

The reports underscore why the Bank of Canada cut its trendsetting rate by a further quarter point this week, on top of the half-point cut earlier this month, and why it indicated that it will be cutting them even further in the months to come, he noted.

The central bank this week warned that the U.S. economy is already in a recession that would spill over into a mild global recession, but stopped short of saying Canada’s economy would also be pulled down into one.

In light of the "forcefulness" and "gloominess" of the central bank’s forecast, TD Securities chief economist Eric Lascelles said it now expects the central bank will cut its trendsetting target rate for overnight loans to the banking system by a further half a percentage point to a modern-day low of of 1.75 per cent.

The seriousness of global situation was highlighted by a White House announcement that U.S. President George Bush will host a summit of world leaders on Nov. 15 to discuss the global financial crisis.

The weakness in oil prices and other commodities, which reflect concerns about a U.S.-led global recession, also continued to weigh heavily on the TSX, which fell 558.9 points to 9,236.9.

Amid the market gloom, there were optimists, however.

"We have urged investors to stay the course over this period of extended volatility," Richardson Partners Financial Ltd. said in a report entitled - The Bottom is Nigh.

"History has shown us time and time again that when panic selling takes over, markets tend to overshoot to the downside," the Montreal based investment firm said, adding that panic selling comes from leveraged investors who are forced to sell into a falling market.

"Investors who are not leveraged and who have a long-term focus can weather these inevitable storms in the market and don’t have to give into the panic," it said. "When the markets then stabilize, these investors can then adjust their asset allocations to take advantage of relative value discrepancies between stocks and bonds positioning themselves for any rebounds in the market."

But it’s not just Bay Street investors who are being hit by the weakening global economic outlook and the fall in commodity prices.

The slump in commodity prices hit Canadian crop farmers hard in late summer, according to Statistics Canada, which reported that prices those farmers received for their produce fell 8.8 per cent from July.

Still, on a year-over-year basis, crop prices were up 17 per cent, maintaining the double-digit increases that began in November 2006, the federal agency noted.

The housing market may also be holding up be holding better than has been reported.

TD Securities, despite it pessimism about the overall economic outlook, said the reported 6.7 per cent average year-over-year drop in home prices in major Canadian cities last month dramatically exaggerated the depth of the slump.

The real decline was only 1.3 per cent, TD Securities calculated, arguing that the report did not take into account that a steep drop in the average price in Vancouver was due to the fact that there was a drop in the proportion of expensive homes sold in that city during the month.

"As a result, concerns that the Canadian housing sector may follow its U.S. counterpart into a major correction may be overblown," TD Securities said.