The Canadian business news equivalent of “if it bleeds, it leads” has got to be the quarterly earnings reports of the Big Five banks.  This week it’s the Royal Bank of Canada, reporting its first losses since 1993.

It’s one seeming irony that Heather Scoffield has pointed out – for so long it’s been the other way around: our banks soaring, the envy of the world, our economy on a sound footing, and yet the poor loonie couldn’t grow its wings.  It was unfair, too, in comparison with our neighbour to the south, an economy like an elephant in a china shop yet whose greenback kept receiving the benedictions of sovereign wealth funds around the world.

Historical Highs and Lows of the Loonie

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About two weeks ago, we finally started to see more of the long-forecast decline in the USD (US Dollar) as a result of domestic and trade deficits as well as more inflation (read: printing of dollars) than the American economy has ever seen in such a short time.  And just about one week ago, the loonie finally started to shoot up again.  Last Friday, as I recall, it was sitting at 89 cents to the dollar.  This Friday it’s at 91.  Historically, Canadian economic pundits like to place it within an ideal range of about 82-86 cents (ideal only in the sense of helping the Canadian export economy as much as possible without hurting it).

Historical Highs and Lows of the Canadian Dollar Against the USD

It’s just coincidence that the rise of the loonie on equity markets’ strength, consumer confidence and inflation in the greenback has occurred around the same time that Canadian banks are reporting second quarter earnings.  And here, it seems, the 6-month economic echo from the U.S. is finally hitting us.

Along with the loss in earnings over the past quarter at Bank of Montreal (BMO) and the Royal Bank of Canada (RY), the Canadian economy itself is registering some of its worst deficits ever, and only its second straight deficit after years of surplus.  According to Scoffield’s report, economist Andrew Pyle of ScotiaMcLeod notes:

“I can remember when the mere mention of a deficit for Canada would either get you laughed off stage or cause the loonie to plunge [or both] yet we’re about to see the worst deficit on record and the currency is back above 90 cents… Go figure.”

Canadian Banks’ Second Quarter Earnings
RBC $50 million loss ↓
TD $618 million profit ↓
BNS $872 million profit ↓
CIBC $ 51 million loss ↑
BMO $ 358 million profit ↓

You can see from these figures that CIBC, who was in trouble early on, seems to also be the first one out of it.  Perhaps not surprising given how much further it was already entwined with US markets.  And if risk-taking is a growing sentiment in trading now, it makes sense to see CIBC up, since it is also perceived as the most “risky” of the big 5 (in as much as you can call a Canadian bank risky).  As for the others, Royal Bank has posted the least amount of losses, but it’s still in a downward trend, as are Scotiabank and TD.

For buy and hold investors of Canadian banks, however, none of these figures are heavy enough to pull down the banks’ outlook going ahead past two years.  It’s still true that you can also make a nice buck off the banks’ backs.  The question now is whether we will still see no dividend increases in 2009, particularly from TD and Scotiabank.

When To Buy US Dollars

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In the meantime, though – ironically – it’s a good opportunity for Canadians to pick up some of their favorite U.S. stocks now that the loonie is in more comfortable territory again.  Check out these articles on buying USD and how to time your purchases to get the best exchange rate.

What Makes the Loonie Rise and Fall Against the US Dollar?
When To Buy US Dollars and Take Advantage of the USD/CAD Exchange Rate

You might also like to check out some of these articles on recent Canadian news and trends:

Rob Carrick explains why you need to check your insurance if you’re doing home renovations.
Actuary Riscario Insider talks about Canadian billionaire Seymour Schulich’s book Get Smarter.
The Canadian Capitalist shares his views on the new Claymore Gold Bullion trust.

Also, if you missed him on this week’s Questrade webcast with Jon Chevreau and Michael Hainsworth, be sure to read Million Dollar Journey’s replies to a reader’s question on Leveraged RRSPs vs. the Smith Manoeuvre.

• Market Jitters: Are We About to See the End of the Risk Rally and Bear Market Bubble?
• Commodities Currencies Trade With Oil Prices
• More Bank Failures Coming Up Ahead
• Best American Stocks for Canadians To Invest In
• Could This Be The Beginning of The Turnaround?

• Weakon 180: Intro to the Fed, Part I
• Venezuela Devalues Its Currency
• 5 Top Secret Steps When Blogging to the Bank
• Ceramic Piggy Banks
• That Crazy Loonie

Tagged as: Canadian banks, Canadian dollar, Canadian economy, deficits, inflation