The Canadian dollar has been trading near 11-year lows of around 76 or 77 cents U.S. over the past couple weeks, and while that may seem to be a marginal issue in the federal election, if history is any indicator, it could be a very bad sign for the governing Conservatives.
Why? Because the last two governments to hold an election after a major drop in the loonie were wiped out in landslides, Bloomberg Business reports in an analysis of economic data to watch ahead of the 2015 election.
They produced a chart showing the change in the Canadian dollar's value for the 12 months ahead of every federal election in Canada since the loonie started floating freely against other currencies in 1970. It showed that the largest declines in the Canadian dollar — before this most recent decline — preceded major electoral routs in 1984 and 1993.
Bloomberg ran this chart titled “The loonie as predictor of landslides,” which we marked up to highlight the relevant bits.
In 1984, the Liberals under leader John Turner got trounced in the federal election, giving Brian Mulroney’s Conservatives the largest majority in Canadian history. The loonie had fallen more than 7 per cent in the year before the election.
In 1993, that Conservative government, now headed by Kim Campbell, was nearly wiped out of Parliament entirely by the Liberals under Jean Chretien. The loonie had fallen nearly 8 per cent in the 12 months before that election.
And now we are headed into an election in which the loonie is 17 per cent lower than it was a year earlier — the largest one-year decline on record. If these economic indicators are anything to go by, the Harper government is headed for a record-breaking rout.
But are they actually anything to go by, or were these past landslides a coincidence?
Certainly very few voters make a decision on who to vote for based on the exchange rate. Research suggests a falling currency is a good news/bad news story. If you’re a Canadian with an investment portfolio your foreign investments are worth more in loonie terms, and you feel richer. But if you’re buying from abroad or travelling to a foreign country, you feel poorer.
And news reports of a loonie that keeps hitting new lows can have a negative impact on the electorate, giving them the impression of an unhealthy economy.
Canada’s economy is certainly unhealthy these days, though it’s a matter of debate just how serious the health problems are. The things that largely support the value of the loonie — particularly commodity prices — have been suffering, with the oil price collapse just the most obvious element.
The oil, gas and mining sector was 7.3 per cent smaller in StatsCan’s GDP report for June than it was a year earlier. Manufacturing, which accounts for the bulk of Canada’s non-energy exports, was 2.3 per cent smaller than a year earlier.
And just today TD Economics released its latest report on commodity prices, showing another plunge in July. The bank is now predicting its commodity price index will hit its lowest point since 2009, when the world was in the grips of a financial crisis, before starting to bounce back later this year and next. Weaker commodity prices almost always mean a weaker loonie.
The Bank of Montreal said Monday that prices for Canadian oil exports are also at their lowest point since 2009.
"The Canadian economy was already hit hard in the first half of 2015 by the initial huge drop in oil prices. If the latest slide persists, there would likely be downside risk to our GDP forecast" for the second half of the year, BMO economist Benjamin Reitzes wrote.
In this context, it seems more likely that if the Harper government loses power come October, it will have more to do with the country’s shaky economic situation than with the exchange rate that is a symptom of the problem.
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