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?