Canadian Natural Gas Pushing Canadian Dollar

CALGARY -- The Canadian dollar is often talked about as a petro-currency, but it's natural gas that is doing much of the heavy lifting.

With the price of natural gas recovering to double-digit levels since the beginning of the year, count on the loonie's strength continuing, CIBC World Markets senior economist Avery Shenfeld predicted on Monday, heading for US$1.05 this year and staying in the US$1-to-US$1.05 range in 2009 as well, regardless of what happens to the economy in the United States.

"There are a lot of fears that Canada is about to develop a very large trade deficit, because of the weakness in our manufacturing sector, and that won't happen if natural gas and oil prices keep rising," Mr. Shenfeld said in an interview. "They will simply be replacing our trade surplus that we used to have in things like automotive products, with a larger trade surplus in energy."

In a weekly foreign exchange outlook, Mr. Shenfeld said natural gas, not oil, has been contributing the most to the trade surplus in every year since 1975, with last year's natural gas trade surplus reaching over $25-billion, next to crude oil's $18-billion.

"Double-digit gas prices and triple-digit oil should prevent Canada from developing a material current account deficit this year even as factories shut their doors," he said in the report.

The natural gas recovery will further "tilt" the country's economy toward Western Canada, which produces what the world wants most, and "these days, that is energy."

Mr. Shenfeld said oil has been getting a lot of attention as a top engine of the Canadian dollar because it's more noticed by consumers and investors.

In reality, natural gas results in a larger trade surplus because the trade is largely one-way, from Canadian producers to U.S. consumers.

In the case of oil, exports from Western Canada are offset by imports in Eastern Canada. Last year, Canada imported crude oil worth $23.7 billion (not including petroleum products), while it exported crude oil worth $41.3 billion.

"To the extent that trade surpluses matter for a currency, which they do, natural gas should be more important than oil, because the trade balance is larger," he said, noting that years in which Canada had the largest trade surpluses tended to be associated with spikes in natural gas prices, generating a lot of Canadian dollar buying.

The Canadian dollar depreciated marginally on Monday, to US99.40¢, down 0.11, in anticipation of a Bank of Canada cut today to its benchmark interest rate.