BlackBerry Deficit Draws Amundi Bet Poloz on Hold: Currencies

Jan 14, 2014 7:39 pm ET

(For a Currencies column daily alert: SALT FXCOL.)

Jan. 15 (Bloomberg) -- Smartphone maker BlackBerry Ltd.’s slide from innovator to also-ran epitomizes the challenges facing the Canadian dollar as the North American country looks to exports to fuel growth.

“Now Canada buys more iPhones than it sells BlackBerries,” James Kwok, the London-based head of currency management at Amundi Asset Management, which oversees the equivalent of $1 trillion, said in a Jan. 7 phone interview. “A lot of structural changes have been happening in Canada over the last few years, which has made Canada’s trade balance structurally weaker.”

A report last week showing a trade deficit nine times wider than economists forecast started the Canadian dollar’s plunge to a four-year low of C$1.0959 yesterday, and left it poised for a sixth monthly decline against a basket of nine developed-nation peers, the longest slump since 2002. Kwok is betting that slide is only the beginning and hedge funds and other speculators are joining him, amassing almost the most bets against the currency in about nine months.

Canada’s economy grew at the slowest pace since the recession last year, and has posted the longest streak of consecutive trade deficits in at least 25 years, as the country has been forced to discount its largest export, crude oil, amid shipping bottlenecks, and BlackBerry became the latest manufacturer to cut operations.

Worst Performers

“In the past, Canada benefited a lot from the U.S. economy because they are very close to each other -- a big part of exports from Canada are going to the U.S,” Kwok said in a telephone interview. “This time is different. I think the recovery will be much slower unless the Canadian dollar goes much lower.”

The loonie, as the Canadian dollar is often called for the aquatic bird on the C$1 coin, weakened 0.8 percent yesterday in Toronto to C$1.0946 per U.S. dollar. One loonie buys 91.36 U.S. cents. The currency’s 3 percent decline this year makes it the worst performing currency in the world after South Africa’s rand and those pegged to the rand, the Lesotho loti, Swaziland lilangeni and Namibian dollar.

Against the greenback, the difference in the number of wagers by hedge funds and other large speculators on a decline in the Canadian dollar compared with those on a gain, known as net shorts, was 60,542 contracts as of Jan. 7, data from the Washington-based Commodity Futures Trading Commission show. The average over the past year is net shorts of 23,986.

Trade Deficit

The Bank of Canada is expecting exports to revive flagging growth, though central-bank Governor Stephen Poloz said he doesn’t “fully understand” why exports haven’t been stronger, in a Dec. 17 interview with Bloomberg News.

Kwok’s bet the loonie will continue to drop is based on Poloz’s assurances he will keep interest rates low until the economy recovers, and the central bank’s assumption that exports will fuel the recovery. The only way for both those conditions to come about is for the currency to weaken, Kwok said.

The U.S. Federal Reserve will oblige, he said, as it lets interest rates rise by slowing monetary stimulus, drawing capital looking for higher returns back into the U.S.

Canada’s November trade deficit widened to C$940 million ($858 million), Statistics Canada said Jan. 7 in Ottawa. The median forecast was for a C$100 million deficit, according to a Bloomberg News survey.

BlackBerry Cuts

The same month, Canada imported C$1.1 billion more communications equipment, including smartphones from rivals to BlackBerry, than it sold abroad -- double the deficit from six years earlier, according to Statistics Canada.

In 2012 Waterloo, Ontario-based BlackBerry lost the top spot for Canadian smartphone shipments to Cupertino, California- based Apple.

The company’s stock has fallen more than 90 percent from its 2008 peak after losing smartphone market share for years to rivals led by Apple and Samsung Electronics Co. BlackBerry cut its workforce by about 30 percent last year.

Lisette Kwong, a spokeswoman for BlackBerry, declined to comment on the impact the falling currency will have on the company and the effect of the company’s cuts on the broader economy.

Funding Currency

The loonie could fall to C$1.17 per U.S. dollar by the second half of this year and C$1.30 per U.S. dollar by the end of next year, according to Jack McIntyre, who helps manage $38 billion in bonds from Philadelphia for Brandywine Global Investment Management LLC., and is borrowing the currency to invest in higher yielding assets.

McIntyre said the trading relationship with the U.S., which is destination for about 75 percent of Canada’s exports, has changed due to the discount Canadian producers get on their oil, growing U.S. oil production, and a shrunken manufacturing base. Whereas 1 percent of U.S. growth once meant 1.5 percent growth for Canada, that’s no longer the case, he said.

“Our models are still telling us the Canadian dollar is overvalued,” he said in a Jan. 14 telephone interview.

Lack of pipeline infrastructure to reach international markets has resulted in a discount on Canada’s largest export, heavy crude oil, compared to U.S. benchmark prices. That discount sat at $18.50 per barrel yesterday, and reached a record $42.50 per barrel in December 2012. Canada pays international prices for the crude oil it imports, which amounted to C$1.5 billion flowing out of the country in November.

Shrinking Manufacturing

At the same time, U.S. imports of oil plummeted to the weakest in three years in November as advances in domestic extraction put the U.S. on track to become the world’s largest oil producer by 2015, reducing dependence on foreign producers.

Manufacturing output in Canada accounted for 10.5 percent of gross domestic product in October, down from 16 percent in August 2000, according to data compiled by Bloomberg.

The change has meant Canada had less exposure last year to the best U.S. auto sales since 2007, after a decade that saw the three largest U.S. automakers ship more production to Mexico and the southern U.S.

Even so, Kevin Williams, president and managing director of General Motors Canada, said the loonie’s recent drop isn’t enough for his company to increase operations in Canada.

“A precipitous drop that is sustained over a reasonable amount of time would be something that you’d be adjusting to,” he said in a Jan. 13 phone interview from Detroit. “Fluctuations and drops of the magnitude we’ve seen thus far actually allows us to get a better assessment of what we think is happening, but you’re always careful not to overreact.”

‘Cautious Side’

The three largest U.S. auto companies’ output in Canada was 1.48 million vehicles in 2011, down 24 percent from 2002, according to DesRosiers Auto Consultants. Employment dropped 55 percent to 20,777 workers over the same period, according to the Canadian Autoworkers Union.

“There’s ongoing concern that some of the structural headwinds facing manufacturing will persist despite the cyclical rebound in U.S. demand,” Derek Burleton, deputy chief economist at Toronto-Dominion Bank, said in a Jan. 14 phone interview. “We are more on the cautious side in terms of export rebound.”

--With assistance from Ilan Kolet in Ottawa and Hugo Miller in Toronto. Editors: Dave Liedtka, Kenneth Pringle