Econowatch

As tongue-lashings go, it was rather sedate. When the Bank of Canada left its overnight interest rate at 0.25 per cent on Tuesday, it took the opportunity to send a message to currency markets. If the loonie continues to approach parity with the American greenback, it will “more than fully offset” the recent signs of recovery.

Those would hardly be fighting words—normally. Except this isn’t the normal world. It’s the rarefied realm of central banking, where economists hang on every intonation for hints of future policy changes. In that context, the warning came like a blow to the solar plexus. It worked, too, for now. After climbing nearly 18 per cent this year, the Canadian dollar fell two cents immediately following the central bank’s statement, to US95.3 cents.

Whether it will stay down is another matter. Some smart investors don’t think so. Last week Dennis Gartman, editor of the influential Gartman Letter, was in Toronto and told a gathering of financial analysts that “the [loonie] will move way past parity.” This from a man who, 20 years ago this month, laid out his “ridiculously simple rules” for trading, with number two being “buy high and sell higher.” So how much higher could the Canadian dollar go? At least another 14 per cent more than it has already, he said.

There’s a lot of evidence to suggest he’ll be proven right. For one thing, commodity prices are far below where they were in September 2007, when the dollar last hit parity. But as the economy recovers, they’ll rise. As they do, it will add even more strength to the loonie. Hence the Bank of Canada’s fears that the dollar will crush Canadian companies that rely on exports for their survival.

But another thing has changed, and it offers hope that companies are coming to terms with the strengthened dollar. Earlier this month, the Bank of Canada released its autumn business outlook survey. When businesses were asked if sales are expected to grow over the next year, they were the most optimistic they’ve been in a decade. Nearly 70 per cent said yes. In 2007, with the dollar soaring, the mood was far grimmer. Fewer than half that many saw any upside, and most expected their businesses to flatline or decline.

Does that mean Canadian companies have made the painful adjustment to life with a strong loonie? Not entirely. But they’ve started the process. More importantly, the shock from the initial body blow of a high dollar seems to be wearing off.

GRAPH OF THE WEEK: A bear market rally

It’s no surprise investors are cheering recent market gains. This is the sharpest rally ever seen in the midst of a recession. But some observers wonder if it’s too good to be true, given the still-fragile state of the economy. Is this another bubble?

THE GOOD NEWS

Housing on fire

What was that about a housing correction? In the third quarter, Canadian house prices jumped 11 per cent over the same time last year, as buyers snapped up 135,182 existing homes. In September alone, the number of sales jumped 17 per cent from a year ago, to 42,958, according to the Canadian Real Estate Association.

Sunny forecast

The Canadian economy is forecast to grow 2.9 per cent next year, and as much as 3.6 per cent in 2011, the Conference Board of Canada predicts. There is one catch. The gains are largely the result of massive government stimulus programs.

Fewer claims

The U.S. Labor Department offered some rare but welcome news on the employment front. The number of newly laid-off workers filing for unemployment insurance has fallen to the lowest level since January. First-time claims fell to a seasonally adjusted 514,000, below what economists had expected.

Hogtown boom

Commercial real estate is making a comeback in Toronto after nearly two years of disappointing sales. Investment in properties in Canada’s largest city jumped 46 per cent in the third quarter compared to the previous quarter.