But U.S. inflation, commodity price gains could give loonie room to run in 2011
"Everyone is afraid of the big bad U.S. dollar these days," says CIBC's Chief Economist Avery Shenfeld in the bank's latest Economic Insights report.
Weighing down the greenback, he says, are fears about America's current account deficit consisting of a sizeable trade imbalance that requires unsustainable borrowing from abroad.
A weakening U.S. dollar - already down 20 per cent against its major trading partners since 2002 - has improved the trade balance somewhat by making American products more cost competitive. But much of the trade progress has been due to the recession which has caused imports to fall faster than exports, the report notes.
"A budding economic recovery will spell bad news again for the current account, with the import bill rebounding more strongly than exports. The restocking of depleted car dealer lots and warehouse shelves will draw in a sharp rebound in imports in the last half of this year.
"While still-sluggish consumer spending and Buy America restrictions will hold back imports in 2010, we will likely need a further (U.S.) dollar weakening to prevent a return to larger current account deficits as employment recovers, and consumers return to form in 2011."
Current account fundamentals suggest a further 20 per cent devaluation of the greenback is needed to bring the U.S. to a sustainable current account deficit, notes
The greenback's devaluation to date has tilted towards the euro and commodity currencies including the Canadian dollar, while hardly any move has occurred against major trading partners in Asia. "Asian currencies, particularly the Chinese yuan, have barely budged," he says.
The result is that European majors and the loonie appear overvalued relative to their current trade position.
"Countries that run higher wage and price inflation than their trading partners will tend to have weakening exchange rates, since otherwise their workers and export prices would become uncompetitive."
The complete CIBC World Markets report is available at: http://research.cibcwm.com/economic_public/download/ssep09.pdf
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