Canadian dollar in 2014: Bracing for the new normal

Mark Letain checks the value of the Canadian dollar on a daily basis and endures the mental debate over whether he'll need to make tough business decisions because of a volatile loonie, which recently plummeted to a four-year low.

As chief operating officer of the Winnipeg-based modern furniture store EQ3, which designs and manufactures upholstery locally but imports roughly half of the goods it sells, Letain is preparing for what is shaping up to be another painful year for the loonie.

Who wins and who loses?

There are some obvious winners and losers when the currency plummets. Exporters and border-hopping U.S. shoppers are surely pleased. Letain is on the wrong side. If the currency continues its descent, he has two options: absorb the loss or hike retail prices.

"It's not so much where the currency is that's problematic," says Letain. "What's really difficult is where it's going. When should I buy more U.S. dollars or what kind of hedging strategy should I employ?"

Last week, the currency fell below 92.00 cents U.S. to its lowest level since the fall of 2009, and on Tuesday morning the dollar hovered around 91.50 cents U.S. Some economists have predicted the currency, which shed roughly 7 per cent last year, could fall even further.

If there's one thing that is sure, it's that the currency will be under pressure for the remainder of the year. By mid-2014, economists and strategists are forecasting the Canadian dollar to be at 92.59 cents U.S., roughly around its current level, according to a Reuters poll conducted earlier this month.

In 12 months, the loonie will be valued at 91.74 cents U.S. on dovish Bank of Canada monetary policy and the removal of stimulus by the U.S. Federal Reserve, also known as "tapering."

Last week's employment data was the latest trigger to send the currency on a downward spiral. But the bigger-picture culprits focus on central bank policy, while uncertainty around global and domestic economic growth, oil prices -- along with debate over Canada's ability to export the resource -- will also be big factors, says Camilla Sutton, chief currency strategist at Scotiabank. All this fuels the generally poor sentiment around the currency.

Typically when the currency is at multi-year lows "investors would be fairly bearish," she says.

Last week, chief economists from Canada's big banks weighed in on these factors dominating the economic landscape. For the most part, the country is expected to log growth at just above 2 per cent, while improvements in the U.S., Europe and other emerging nations should be supportive.

Housing market, household spending in focus

But a wildcard could be Canada's housing market, along with weaker than expected household spending, says David Madani, an economist with Capital Economics. He says any improvements in exports and business investment could be offset by weaker housing construction, triggered largely by a pullback in the overbuilt condo market.

EQ3, known for its posh household accessories, upholstery, dining and bedroom sets, imports from a handful of countries including the U.S., China and Mexico. Letain is cognizant of the linkages when it comes to his business. With increased focus on the loonie, Letain is bracing for what 2014 has in store.

"If things continue this way it's going to continue to put margin pressure on not only us, but it'll put equal pressure on other Canadian retailers as well if they're all buying in U.S. dollars," he says.

"I'm trying to decipher what that new normal is going to be."