Thursday, May 17, 2012

So if the CAD is not a petro currency why is it falling?


Over the past few weeks there's been a debat in Canada as to whether the Canadian economy was facing the "dutch disease", which for those who don't know -- the Dutch economy was decimated when the country discovered oil, that drove up its currency and killed its manufacturing sector (we're talking the late 50's and early 60s).

First and foremost the whole "dutch disease" has always been a side bet, even in the Netherlands -- other factors played an equally important role in the destruction of the manufacturing sector; bad management, bad labor practices and bad government policies -- added to a strong currency caused by the the oil & gas sector.

For some reason Westerners  (Canadian -- not global)  have taken the view that the strong commodity sector -- and oil in particular have nothing to do with the strength of the CAD, of course this is complete bullshit, but where they are right, its not the only reason.  Several studies have showed that manufacturing has been on a long decline -- while oil prices have only been a factor over the past 5 or so years.

I remember being in Calgary when oil was around $34/bbl -- wealth was just not there, the same guys with the same assets today are multi-millionaires and talking as if this had always been the case.

Anyway, riddle me this, if the CAD is not a petro currency (where the movement of the currency is tied to the price of oil) what has been happening to the CAD over the past few weeks.  As oil prices have weakened due to Europe and China, the CAD has come under pressure.

Now, Mr. Mulcair has never been one to take a very nuanced vue of the world -- in fact, that's what made him so successful.  It was his point that oil was hurting the economy of Ontario and Quebec -- while this is partly true, other natural ressources are also to blame here -- we are talking grain, metals and minerals here.  But the overall reality is that Ontario manufacturing has been declining for a very very long time. But sound bits are sound bits -- now Western Canadians (not always people with the thickest skin) are very offended...

In reality Canada is not Kuwait/Saudi Arabia, but the reality of our country is that what's made it strong over the past decade has been things that are heavy and heavy and hurt when you drop them on your foot.  Canada is increasingly a natural ressource play -- that's just the truth (look at the composition of the TSX).


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