Image of a balance scale balancing the CDN$ and the USD$

It was only last year that I wrote a post about the Canadian dollar hitting parity, something that was quite a feat considering that it was digging around 60-70 cents back in the early 2000s. Parity is exciting to Canadians, because it makes us feel that our dollar has real purchasing power, and at the same time it makes us resentful when we see how much more we have to pay for things compared to our neighbours to the south.

There are a lot of reasons for the recent strength in the dollar, including a strong natural resource sector as well as a falling U.S. dollar. In fact, much of the rise is really the U.S. dollar falling. When the U.S. dollar index was last around this point 6 months ago, we were also at parity then. As the USD entered into a bull market, the CDN fell. Now that the USD has been falling, the Canadian dollar is rising again and this time we’ve gone beyond parity to hit $1.045.

Compared to commodities the dollar has not appreciated at all. Gold & silver are at significant highs, and depending on how the summer plays out, $1500 gold may not be that far away. The same trend hitting the precious metals is also hitting oil & food which have also become more expensive. Gas is at $1.30 a liter to $1.40 and up, depending on which province you’re in. The prices at the supermarket for some forms of food are much higher than what they were only a few short years ago, even though the Canadian dollar is much stronger now than it was then. The housing market has also been strong (though we need to guard against encouraging excessive reverse mortgages), and housing prices are quite high compared to what they were only 5 years ago let alone beyond that.

Here’s a quick comparison of costs and GDP between Canada and the US:

Average home price $365,000 $272,400
2011 Honda Accord Sedan $24,790 $21,180
GDP per capita $37,933 $45,989

Amounts are in their respective currencies. Canadians earn less and pay more than our neighbours to the south. When the CDN was much weaker than the USD it made sense to pay more for imported goods, but today I’m not so sure that it still does.

Why it could keep rising

Canada came out of the recent financial crisis in a relatively strong position compared to other countries. Housing prices have not been hit hard like they have been south of the border, although some say that signs point to a potentially severe housing correction. Although deficit spending has unfortunately returned, the debt to GDP ratio is low compared to other industrialized countries at around 34%.

Canada has a strong natural resource sector, including fresh water, minerals, and a robust oil & gas sector. Canada is now more economically free than the U.S. according to the Heritage foundation. We’ve definitely come a long way since the horrible deficits and inefficient economy of the 90s, though it remains to be seen if the recent string of minority governments will help us or hinder us.

Why it could stop rising

Mark Carney, the Bank of Canada governer, has said in the past that he would not hesitate to take action against a rapidly rising Canadian dollar. A higher dollar also puts increased pressure on exporters of goods and services; Canadian companies have historically had lower productivity compared to our friendly neighbours to the south, but this was compensated for by a cheaper currency. That’s no longer the case, today.

As the dollar rises, firms becomes more expensive to run and less competitive in the global market. To counteract this, countries are often tempted to devalue their own currency in an attempt to become more competitive in the global market, but that has its own problems.

To parity, and beyond?

As a Canadian, the rising CDN makes it cheaper for me to spend and invest in US markets and abroad, although it has the downside of affecting investment returns and reducing income that comes from overseas, and one needs to look at the broker transfer fees as well. Right now though most of my income comes from my job which is in CDN, so on the other hand the downside will be that the company will earn less in USD income after paying down higher CDN costs. Nonetheless I feel that a stronger currency is a good thing, and if it encourages businesses to cut costs then that makes our economy stronger in the long run.

So, to parity… and beyond? What are your thoughts on the recent strength in the Canadian dollar, and how far do you think it will go?

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About

Kevin has left the office, and he is currently fighting the rat race by working on his own business. He enjoys exploring unvisited places around the world and gaining new experiences. He believes that by properly managing our energy and time, we can learn to invest our lives wisely.

35 Comments Kevin on Apr 12th 2011

35 Responses to “To Parity… and Beyond”

  1. If we’d waiting until now to import our car we would have saved over $10,000. Hard to predict the FX market though so getting our dollars @ $0.98 wasn’t bad.

  2. Squirrelers says:

    While I’m American, I’ve been a visitor to Canada for many years, as I have an Aunt and Unlce living near Toronto (great city, by the way). I always remember as a kid how we would drive from Chicago, through Michigan and cross the border at Windsor. There, my Dad would get our money exchanged for Canaidan currency. It was cool as a kid to see bills that weren’t all green:) Also, I enjoyed seeing how $1 of ours became $1.30 Canadian. From a kid’s perspective, of course.

    A visit there last year, the first in a while (and my just me alone) surprised me. The Canadian dollar became quite strong, and clearly stronger since. A bit off topic, but what was especially interesting to me was the discussion about housing prices, and how they kept going up and up. It absolutely reminded me of the big surge here in the U.S. in the early-mid 2000’s. Irrational exuberance permeated the conversations, despite the anomoly of price increases of late. Be careful up North!

    • Kevin says:

      The feeling wasn’t so great the other way around, and I remember thinking “why do these bills all look the same?” :P

      About the housing bubble, irrational exuberance is everywhere! The thing is, it’s not as irrational as you think. It’s perfectly normal for people to speculate if they think there’s someone out there that will pay more than they did. Why wouldn’t they flip a house if they could do it? It also seems that the further west you go in this country the worse it gets; I don’t understand high housing prices on the prairies where there is almost limitless land to expand on and not a significant population, though before the bust I guess high labour costs helped to explain part of it.

      Vancouver’s gotta be the biggest enigma to me though. You have near San-Fransisco prices but certainly not near SF salaries. Land is actually limited there and there are a lot of wealthy foreigners that buy, but then again.. that’s true of other markets as well. I can’t say that prices there are ripe for a crash but I would be nervous about paying $1 million for a house over there.

  3. I think that prices always tend to go too far in a given direction. I don’t know if the U.S. dollar has dropped to that point yet, but it will at some point. And when that point arrives, nobody is going to be holding up signs to suggest it. At that point, the U.S. dollar will be a pariah, but will be ready for a strong rebound. The loonie hasn’t strengthened, really, compared to world currencies, from what I have seen. It has been losing plenty of ground to the Aussie dollar. But the U.S. dollar has surely slumped. It will be interesting to see how long that lasts.

    • Kevin says:

      Yeah I think we’ll see overshoots and then pullbacks, but the unpredictable thing about markets is you can never predict which time will be the “last time”. Maybe there will be a time when the U.S. dollar won’t rebound the way that people expect it to, just like there will be a time when gold won’t continue to keep rising the way people expect it to.

  4. From my perspective (I’m paid in Singapore dollars) the Canadian dollar has lost a lot of ground! It’s all about perspective too.

    • Kevin says:

      That’s true; we’re so focused on parity with the U.S. but what people fail to realize is that there’s no fixed yardstick. When doing these sort of comparisons people assume that one currency is fixed, but to more accurately gauge a currency’s strength we have to compare it against all other prices not just one other currency. The currency exchange markets are like a wild storm where every ship is moving around relative to each other and there is no place to stand safe from the change of value. ;)

  5. My sister-in-law grew up in Canada, and she and my brother (and kids) often make the trip across the border into her native land. Based on your table, it looks like it must be pretty tough to survive there! I had no idea that the average wages were so low!

    Hopefully things change, because I had thoughts of living in Canada someday…

    • Kevin says:

      Nah, it’s not at all tough to survive here. It’s very easy to afford a home and transportation although maybe we don’t have as much spending power as Americans. The downside though is that things like healthcare, although we rarely will see a $100,000+ bill for an operation, the downside is that it is in short supply. All of the specialized operations are more or less only available in the states, and we otherwise need to wait in line for everything else. For example, want an MRI? You can wait 6 months to a year, or you can pay $600 – $800 to get it done right away.

      I think that Canada is a place where there is less risk but perhaps less reward. Gun violence and stuff like that is rare up here, and a family going bankrupt over unexpected medical expenses is rare, too. The trade-off is the very high taxes that result which stunts growth and lowers the supply of everything, so we pay a high price over the long run for that sort of security which is why we had a huge problem with brain drain until recently. Now that the U.S. is going down a path that will probably end up with significantly worse health care than us the tides might reverse. ;)

  6. I grew up 20 minutes away from Windsor, and went there frequently. (Especially once I was 19…) I was young and ignorant then and didn’t really understand the intracacies of why my American dollar was worth more than a Canadian dollar, but I knew I liked it. Now, I am frustrated that the value of the American Dollar has dropped so much relative to the Canadian dollar. People from here used to go to Canada to shop, but not anymore.

    Regarding health care, I don’t know that any country has it perfect (this is in reference to your earlier comment/response). I have heard that with socialized medicine, people quite often have to wait for their surgeries and such. I do recognize you pay more in taxes, but I am also curious really how much more you pay considering how much we have to pay here for premiums and other expenses. If you added up the incremental amount you pay and taxes and the amount we pay in health care costs, who is really paying more? I really don’t know the answer as it depends on each person’s health and insurance situation. However, I know I am out thousands of dollars already this year, and that doesn’t even include the 500 a month we pay for insurance through my husband’s employer. On the other hand, we have been able to see specialists at a moment’s notice. Tradeoffs!!

    • Kevin says:

      I think a rough estimate is that 25% of total government spending goes toward healthcare. A married couple making $80k before tax with two kids pays about $30k in tax, so ignoring deficits for the moment that means that this couple paid $7,500 toward healthcare. Add in private insurance with your employer and you’re up to $8,500 to $9,000. Add on dental, eyes, and other things which insurance does not fully cover and let’s say you’re up to $10,000. Let’s say you don’t want to wait 9 months for an MRI so you pay for one, then you could be up to $10,500 or so depending on how much your private insurance will cover.

      If you’re like a recent Premier that flew to the U.S. to have an operation, then you’re up to $100,000 or more. ;)

      Honestly I don’t know if Americans overall pay more or less, and in my opinion the American model is certainly nothing to aspire toward. My own personal feeling is that, like any other industry, costs are lowered and quality is improved when there is healthy competition between service providers. Why not have healthcare run entirely by the private sector, but with absolutely no government involvement and no company involvement in the politics and no privileges granted (I told you I don’t like the American model :))

      The only privilege should be toward the citizens who pay taxes, and here the government should cover catastrophic costs for those unable to pay. This is how it works in some other countries and it’s amazingly more efficient, even though they spend the same or less!

  7. Hard to say… I do know that the current system in the US is a failing one in my opinion, for both the rich and middle class.

    The rich because their money is worth less outside of the country and bad for the middle class because they don’t have any jobs that won’t eventually be outsourced to foreign workers making $1 an hour…

    For the corporations outsourcing in the US, that old say “The rich get richer and the poor get poorer” might be true… although maybe it should be “The rich get richer and the middle class get poorer” instead…

    Perhaps the US economy will get a boost as more Canadians visit the US as tourist?

    I wonder if the increase in labor costs in Canada has even more US firms going to offshore companies for jobs, instead of Canadians? If so, I’m sure it’s a very small percentage.

    • Kevin says:

      Canada has tons of trade with the US so if the imbalance becomes too high it’s going to have adverse effects on our economy as well, so it could be painful for both of us if the dollar keeps plummeting.

  8. We used to drive up to Vancouver in early 2000s and there were a bunch of great deals to be had. The Mrs. got her one and only Tod’s bag back then. I don’t think we can afford another one anytime soon. We have got much cheaper since then and the strong CD $ doesn’t help.

  9. 101 Centavos says:

    The higher C$ has been rough on Canadian exporters. In my day job, I used to source quite a bit of fabricated equipment with Ontario suppliers, even up to the last couple years. Even a higher fully burdened labor rate was masked by the disparity in currency exchange. Not so much the case anymore.

    • Kevin says:

      With the CDN where it is now, prices of pretty much everything are probably higher in Canada except for a few hotspots like Manhattan and Silicon Valley. I wonder where it’s all going to end up…

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  14. Well, it’s time to plan a shopping spree this summer in the US. Maybe by then we will be at $1.10 US for each Cdn dollar!

  15. Kevin,

    Congrats on hitting parity with your dollar. I think you’re right that it’s more a failure of the USD than an increase with the CD. But, it’s still one heck of an indicator for your economy.

    Back when I used to travel to Canada on business in the ’90s, the Canadian dollar was pretty low. And, the currency exchangers would never take them back when we were leaving the country. So, we offered the merchants US dollars and they were happy to take them at a fair rate. I’ll bet that has changed.

    Bret

    • Kevin says:

      That was when the Canadian economy was in poor shape and the dollar near a 60 cent low, I think? Things have really changed over the past 15 years…

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  17. Well, if you have some cash to invest in rental property, now’s the time to come down to the lower 48 and buy a house. They’re practically giving the things away here. As in previous recessions, Canadians are flocking to buy real estate. The difference now, IMHO, is that there’s no longer any guarantee that real estate prices will recover pre-bubble prices, because the American middle class is going away.

    That means fewer people will ever be able to buy again, and a large portion of the former middle class will remain unemployed or chronically underemployed, permanently. The rental market here in Arizona is strong, because the people who were thrown out of their homes have to live someplace. Though many are living on the streets, most can still afford to rent. So, if you can find a house at a price that’s low enough to allow the going rental rate to turn a profit for you (which you certainly can!), this is a great time to be in the market.

    • Kevin says:

      Problem is you need the cash cause AFAIK the banks won’t lend to Canadians. If you do have the cash to buy property outright then there were likely a lot of good deals; I heard at some point beachfront condos in Florida were much cheaper than properties here up north. I don’t know if that’s still the case but there’s probably still many good deals to be found.

      The housing bubble was a colossal waste of capital and there’s definitely been a lot of personal suffering there. It’s going to take some time to get over it and now the focus is on whether Canada is heading toward a similar fate or not.

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    This is an excellent overview of the Canadian Dollar Vs. USD. Being Australian, living in America, I have had a closer eye on this exchange rate. The Canadian Dollar follows a similar path to the AUD, in fact their economies have a lot in common, with a heavy resource base. Thanks for your perspective.

    • Kevin says:

      I believe that the AUD has done even better than the CAD relatively speaking? I only wonder what happens when the U.S. faces some real competition as a reserve currency and as a major component of central bank holdings.

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