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David A. RosenbergOctober 27, 2009
 Chief Economist & Strategist Economic Commentarydrosenberg@gluskinsheff.com+ 1 416 681 8919
 
MARKET MUSINGS & DATA DECIPHERING
Special Report: Learning to Love the Loonie
If there is one thing that Canadians are never happy with (in addition to theirlocal hockey team) it is the Canadian dollar. When it was flirting near that recordlow of 62 cents nearly a decade ago, everyone lamented the future of the Loonieand closer ties to the U.S. were being recommended from various corners of BayStreet. It was too expensive to buy anything that was imported, it was too costly to make that annual trip to Florida, and tickets to a Broadway play wereprohibitive. We felt poorer. We must have been doing something wrong.
If there is one thingCanadians are neverhappy with, it is theCanadian dollarThe strength in theCanadian dollar is notonly a USD story
But we did nothing wrong back in those days because it was 100% a U.S. dollarstory. The U.S. was home to the Internet mania and all the global capital flow that came with it and Robert Rubin, Treasury Secretary at the time, was carrying out an overtly strong dollar policy partly to keep inflation at bay in what was anoverheating U.S. economy. Moreover, commodities were in a bear market, andsince the U.S. is a net raw material importer, this too provided impetus to theU.S. dollar rally. I recall all to well telling clients that the Loonie was actuallyeither holding its own or appreciating against the global basket of non-U.S. dollarcurrencies. People would just roll their eyes because who cares about othercurrencies when most of our trade and travel is with the U.S. That, of course, is true, but it misses the point; the weakness in the CAD was the flip-side of thestrength in the U.S. dollar. The fact that we were outperforming the other majorcurrencies was a reflection that we were not doing anything wrong.
CHART 1: CANADIAN DOLLAR NOT JUST A USD STORY 
Canadian Dollar
 
*A weighted average of bilateral exchange rates for the Canadian dollar against the currencies of Canada's major trading partners. The six foreign currencies in the basket are the U.S. dollar, the Euro, the Japanese Yen, the U.K.Pound, the Chinese Yuan, and the Mexican Peso.Source: Haver Analytics, Gluskin Sheff 
 Versus Six Major Currencies ex USD*
(1992 = 100)85909510010511011512012513098 00 02 04 06 08
 Versus USD
(US$/Canadian cents)606570758085909510010511098 00 02 04 06 08
 
Please see important disclosures at the end of this document.
Gluskin Sheff + Associates Inc.is one of Canada’s pre-eminent wealth management firms. Founded in 1984 and focused primarily on high net worth private clients, we are dedicated to meeting the needs of our clients by delivering strong, risk-adjusted returns together with the highestlevel of personalized client service. For more information or to subscribe to Gluskin Sheff economic reports
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visit www.gluskinsheff.com
 
 
October 27, 2009
– BREAKFAST WITH DAVE
 
Fast-forward to today. Canadians are now fretting about a strong currency.After all, it is going to crush our manufacturing sector, kill our export base andundermines our domestic competitiveness. Even the Bank of Canadacommented on how the strength in the CAD is dampening our growth prospects,cutting its medium-term GDP growth forecast.
Remember, whencurrencies move in anydirection, there aregoing to be winners andlosersThe rise in the Canadiandollar is good in manyrespects — it improvespurchasing power andstandard of living
Let’s all step back and take a deep breath. Remember, when currencies move there are going to be winners and losers. For years when the CAD was trading around 60 cents, exporters did indeed reap the rewards, while importers were hithard by the rising costs of their purchases. Our competitiveness and exports to the U.S. did improve, but we needed that source of growth as an antidote to thepain from all the budget belt-tightening during the 1990s as we got our fiscalhouse in order. Of course, there was no shortage of complaints from thesnowbirds on how their travel costs to Florida had become prohibitive. Today’sstrong Canadian dollar is obviously going to pose a tremendous challenge to ourexporters, but hopefully they made strides in improving productivity and getting  their house in order when they were sheltered by those years of CAD depreciation.While Canada is a large exporter, we also are a huge importer. At $400 billionannually, we import as much as we export and the cost of these imports are nowgoing down; a very good thing from a profit margin perspective. The Canadiandollar’s ascent is good many respects, even if it is a roadblock for ourmanufacturing sector, which is only 12% of the economy. Our purchasing powerand standard of living is actually going up as a result.Now, why is the Canadian dollar back near parity against the greenback? Thereare valid reasons for the Canadian dollar to be going up at this time, and quitelikely for the next several years. As Canada had to rely on a soft currency in the1990s, make no mistake that cleaning up the budgetary mess in the U.S. is going  to require a similar strategy. I would contend that the Obama Administration isalready carrying out a policy of ‘benign neglect’ when it comes to the U.S. dollar.
CHART 2: CANADA IN BETTER SHAPE THAN THE U.S.
(as a percent of GDP, 2009 forecast)
*Using 1Q 2009 figuresSource: Haver Analytics, IMF forecast, Gluskin Sheff 
 
266462952030405060708090100Gross Federal DebtGross External Debt*CanadaUnited States
Debt
-0.9-3.4-2.8-11.2-12-10-8-6-4-20Current Account DeficitBudget Deficit
   i  n  v  e  r   t  e   d  s  c  a   l  e
CanadaUnited States
Deficit
 
Page 2 of 9
 
October 27, 2009
– BREAKFAST WITH DAVE
 
Moreover, commodities have come out of the rubble caused by the Lehmancollapse and have resumed their upward trend, accentuated by the powerfulsecular growth dynamics in emerging Asia, which were dented, but not derailed,during the depths of the credit crisis.
CHART 3: COMMODITY PRICES BOTTOMED AT PREVIOUS PEAKS
CRB Spot Index
(1967 =100)
 
10015020025030035040045050072 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08
 
Shaded region represent periods of U.S. recessionSource: Haver Analytics, Gluskin Sheff 
TABLE 1: COMMODITIES BOTTOMED ATHIGHEST RECESSION LEVELS EVER
 
Where Commodities BottomedThis CycleWhere Commodities BottomedDuring Recessions
(December 2007 to current) (average of five recessions)
Wheat $4.86/bushel Wheat $3.08/bushelSoybean $7.59/bushel Soybean $5.05/bushelCorn $2.72/bushel Corn $2.08/bushelWTI $30.81/bbl WTI $20.00/bblGold $712.50/oz Gold $307.30/ozCopper $1.25/Lb Copper* 0.70¢/LbSilver $8.81/troy oz Silver $5.76/troy ozLead 61.72¢/Lb Lead* 38.27¢/LbZinc 57.42¢/Lb Zinc* 51.17¢/LbCRB Spot(1967 = 100) 302.34CRB Spot(1967 = 100)229.11
*average of the last two recessionsSource: Haver Analytics, Gluskin Sheff 
Commodity prices havenow resumed theirupward trend …… and this benefitsCanada since it has 3xthe exposure incommodities than theU.S.
Canada has three times the exposure to commodities than the U.S., so just as this was an albatross during much of the 1990s when basic material priceswere in decline, they are now providing a major impetus to the positive Canadiandollar theme.
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