20 September 2007

No more Monopoly money jokes, eh?

Parity and beyond
How high will the loonie go?
Last Updated September 20, 2007
CBC News
Ever since the Canadian dollar bottomed out at 61.79 cents US on Jan. 21, 2002, it has been on a seemingly unstoppable charge higher.

Since then, the loonie's value has risen by 62 per cent, driven by surging commodity prices, a healthy economy and rising interest rates.

Then, on Sept. 20, 2007, the dollar finally hit a level that seemed most unlikely just a year earlier — parity with the U.S. greenback for the first time in almost 31 years.

The question now being asked is how high the Canuck buck will go.

Canadians may not remember that the loonie was actually worth more than the U.S. greenback for much of 1972, 1974 and 1976 (see chart above). On April 25, 1974, the Canadian dollar went as high as $1.0443 US.

Going back even further, the loonie was worth more than $1.06 US in August 1957.

Most analysts are not expecting it to head to those lofty levels again. But some are.

Beyond parity?
Dennis Gartman, who writes an influential market newsletter, thinks $1.05 US is possible.

"Our clients know us as very long-term bulls on the Canadian dollar, having said for many years that the U.S. dollar and the Canadian dollar are heading eventually toward parity," he wrote on Sept. 11.

"Far beyond parity is entirely possible."

Some of the reasons for the Canadian dollar's strength have been around for years. Commodity prices have been soaring in the last few years. Oil, copper, gold, wheat — you name the resource and Canada seems to produce and export it in abundance.

The loonie is also drawing strength from the comparative strength of the Canadian economy. Canada has healthy budget and trade surpluses; the U.S. runs big deficits in both. The Canadian economy is still generating jobs, while the American economy is shedding workers.

The Canadian housing picture is also much healthier, with little evidence of the subprime meltdown that's shaken the U.S.

The weakness south of the border has the U.S. Federal Reserve slashing interest rates, while the Bank of Canada may soon be raising rates to rein in inflationary pressures.

That divergence has been noticed by currency traders. The futures markets show that speculators are increasingly betting that the Canadian dollar will extend its gains.

The U.S. dollar, on the other hand, has been limping through historic weakness. It's now at an all-time low against the euro.

The implications of parity
On an exchange rate basis, that U.S. vacation is now 60 per cent cheaper than it was back in 2002. We can also expect to see even more Canadian licence plates in the parking lots of U.S. shopping malls near the Canadian border.

Investors who have U.S. stocks will have noticed that the loonie's rise has wiped out the gains they would have otherwise enjoyed. As of Sept. 20, 2007, the Dow Jones industrial average is up 10.6 per cent since the start of the year. But the loonie is up 15 per cent against the U.S. dollar over the same time period. That translates into a bottom line loss for Canadian investors.

It's cheaper to import goods from the U.S. than it has been for a generation. Those who export to the U.S., on the other hand, are hurting even more.

The Canadian Labour Congress cites the high dollar as the main reason for the loss of 250,000 manufacturing jobs since 2002.

But there is no chance that the government would order the Bank of Canada to take measures that would drive down the value of the dollar. The central bank doesn't take orders from the Prime Minister's Office. As Liberal finance critic John McCallum put it: "Once you've got a floating exchange rate, you've got to let it float."

Canada's top banker isn't about to depart from the floating exchange rate that Canada and the United States have had for the past 37 years. In a speech in early May, David Dodge acknowledged "our floating dollar has appreciated sharply and thus, has forced some necessary adjustments."

But he maintained that "a flexible exchange rate regime has definitely helped Canada to maintain production close to full capacity and to minimize the effects of the boom-bust cycles in various sectors."

So look for the loonie to stay high and perhaps go higher still - a floating journey with implications far beyond the currency trading desks.

For one thing, a dollar on par with the greenback makes it easy to compare prices of the same goods in Canada and the U.S. That comparison is even easier with the internet.

Will Canadians tolerate paying $22 for a book that costs $17.50 in the U.S.? How about paying $399 for an iPod that costs $349 in the States? How about shelling out $10,000 more for a luxury European car than the Americans do?

The pressures to reprice may just be beginning.

1 comment:

Anonymous said...

Everyone has their favorite way of using the internet. Many of us search to find what we want, click in to a specific website, read what’s available and click out. That’s not necessarily a bad thing because it’s efficient. We learn to tune out things we don’t need and go straight for what’s essential.
This goal-oriented way of surfing the web is largely based on short-term results. For example, finding facts to write a blog post, doing a comparison before making a purchase and reading a news site to find out what’s happening right now.