Less than three years after hitting an all-time low, the Canadian dollar is on quite a ride. Since January 2003, the once-lowly loonie is up more than 25 per cent against the currency it’s most concerned with – the American dollar. So what’s behind the buck’s run-up? Well, there are several reasons, but most of it “had nothing to do with Canada,” said Avery Shenfeld, senior economist at CIBC World Markets. Washington holds the key to the value of the Canadian dollar.
By Oct. 22, 2004, the Canadian dollar had appreciated by seven per cent on the American dollar for the year – but only three per cent on the euro.The loonie’s been flying mainly because the U. S. economy has been struggling to get off the ground. Washington is facing record budget and trade deficits.
While the Canadian dollar is constantly being measured against its U. S. counterpart because Canada and the U. S.
are neighbours and the world’s largest trading partnership, the loonie is just one of the national currencies that are valued in U. S. dollars, the closest thing to world money. When the loonie has a big move in either direction, some of the effects are instantly obvious.
Canadian products become more expensive for U. S. buyers.With a rising dollar, “the biggest impact is that exporters find it harder to compete,” Shenfeld said.
That could mean lost jobs if the weakest companies are forced out of business. But Atkins said the loss of the price advantage arising from the cheap dollar will force exporters to be more efficient. “This will be good for them in the long run,” he said. Cheaper U. S.
dollars also provide Canadian companies with an opportunity to invest in the tools that make them more competitive. Much of the software and machinery Canadian companies buy to run their operations are bought from the U.S.
A more favourable exchange rate means those companies can invest more in those tools of efficiency. For some companies, including those that have been reporting weaker American sales because of the loonie’s gains, there can be yet another silver lining. As the Canadian dollar rises, the cost of repaying U.
S. dollar debt falls, so many companies actually reported quarterly gains in 2005 based on the loonie’s increase.”Snowbirds” and other Canadian visitors to the U.
S. are finding that their money goes much further. As the dollar jumped, companies that buy in U.
S.dollars but sell in loonies, like petroleum refiners (which buy oil in U. S. dollars but sell gasoline in loonies) or telecommunication providers (which buy telecom equipment in U.
S. -dollar markets, but bill Canadian subscribers in Canadian dollars) should be ahead.However, continuing rising dollar may stop American businesses dealing with Canada as it become more expensive to trade.
This could mean rising unemployment rates in Canada as 40% of population work to export. I feel that is not going to happen because loonie has been propelled by three main drives. First, the surge in crude oil prices sent the currency soaring.Second, increases in interest rates from Bank of Canada which attracted more foreign investors. Third, the prices of other commodities – gold and metals – have influenced Canadian dollar. While these factors will continue to prop up the Canadian dollar over the near term, they will not be as supportive through 2006. Oil price are expected to trend lower. Other commodity prices will level off as U.
S. economy predicted to slow in the second half of next year. To conclude, I want to say that factors like confidence, interest rates, value of a currency and inflation rate all influence decisions to spend, to borrow money or to invest.It is important to stress that the Canadian economy will continue to grow and unemployment will remain low. The continued tightness in labour markets is likely to support solid gains in wages and salaries.
While corporate profit growth is expected to slow, it should remain in positive territory. Corporate balance sheets are also generally in extremely good shape. As economic growth slows close to the end of 2006, the Bank of Canada is bound to ease monetary policy again. Moreover, the weakness will not be evenly distributed across the country.Economic growth should remain above a 3 per cent pace in the west, reflecting the sustained high level of commodity prices. Meanwhile, central Canada, which is more leveraged to U. S.
-oriented non-commodity exports, will experience a weaker performance than the national average as U. S. economic slow down will affect export sector.
Canadian currency is expected to climb down which will strengthen the exports as Canadian product will become cheaper. Finally, the soft patch should pass, and overall Canadian economic growth should accelerate once again in late 2007.