Money Minute: Why the dollar is sinking

Canada’s a teeter-totter. A slab of metal stubbornly placed in the center of a schoolyard with oil-owning provinces like Newfoundland or Alberta set on one side and manufacturing-driven Ontario on the other.

Sometimes they balance, but it’s a hard act to keep up.

What’s in the center? Oil – or the Loonie, either really, take your pick.

“There’s this very tight relationship between oil prices and the Canadian dollar, they move in tandem,” says Mike Moffatt, an economist and assistant professor at University of Western Ontario’s Richard Ivey School of Business. “Asking whether or not the Canadian dollar is going to go down or up is basically asking whether or not oil prices are going to go up or down.”

It’s a paradox of diversity overlooked by the nation’s founder who sought to smoosh the resource-rich west to the peopled east. Sorry, but Canada is kind of a one trick pony.

Sure, other exports are important when it comes to the Loonie says Moffatt.

“But the price of cars doesn’t change ten per cent in a single day right? The prices of all of our other exports change very slowly over time so they don’t effect the currency a whole lot,” says Moffatt. “Whereas we’ve seen oil prices go up and down ten per cent in a single day recently.”

Which is why some provinces are teetering in the mud at the moment with the price of oil – and hence the dollar – hitting a six year low.

When the worldwide economy melted down in 2008, oil prices dropped from around $100 a barrel to $50 a barrel. The Canadian dollar followed suit, dipping to $0.80 but as oil started the dollar rode its coattails pushing past parity of our southern friend’s dollar.

“We saw it in 2008 and we saw it around 1999, when oil prices crashed and ended up $17 or $18 a barrel – that’s when we had the Loonie at about $0.62,” says Moffatt.

Of course, no one is isolated from the Canadian teeter-totter. The lack of economic diversity means a tanking dollar moves like a jetstream across the country.

Newfoundland and Labrador have essentially gone into a recession, says Moffatt. And Alberta is seeing little to no economic growth from oil compounded by all sorts of problems hitting the real estate market.

“(The slipping dollar) has caused the Canadian economy overall to slow,” says Moffatt. “But on the other hand it helps a lot of exporters particularly in southwestern Ontario because it just makes our products that much more competitive in the U.S.”

But Premier Wynne seemed rosy about Ontario’s ability to counterbalance Alberta’s downturn a month ago as the falling dollar makes the province more attractive to foreign manufacturing interests.

And Moffatt tends to agree that the low dollar isn’t all that bad.

“We had this period in Ontario during the late 1990s and early 2000s where everything was going great and unemployment was really low and people in manufacturing were making more money and Alberta was just kind of struggling along,” says Moffatt. “Then the opposite happened from 2002 to 2008 where we had all the plant closures across southwestern Ontario, consumers had less purchasing power partly because of the job loss and partly because they were paying so much to fill up their cars.”

A low dollar and cheap oil may not be fair for everybody, but at least everyone gets a chance to look out across the schoolyard from the top.

In this week’s Money Minute, Yahoo Canada’s Ashleigh Patterson takes a closer look at what other elements are forcing the Loonie down.