Title: The pros and cons of a strong loonie

Sub-title: Canadian dollar’s strong gains against the greenback are great news for cross-border vacationers. But not everyone is happy.

 

As Canadians head off for their summer travels, one group stands to benefit significantly. The loonie, which has gained major ground since the start of the year, including two cents last week alone, means travellers headed to the United States, will get a far bigger bang for their buck on whatever they buy down there.

 

The Canadian dollar, which late last week was trading in the U.S. $0.88 range, has shot up almost 15 percent from its January lows. Yet according to one noted currency expert, despite the visibility of savings accruing to cross border shoppers, the effects of a strong Canadian dollar go far further than just cheaper gas at service stations.

 

“A strong currency makes Canada richer as a country,” said Yves St-Maurice, deputy chief economist at Desjardins Group. “It means we now pay less for whatever we buy in other markets.  Our purchasing power increases and that means our loonie goes much further than it once did.”

 

Increased buying power for businesses and consumers

That said, while a strong domestic currency is almost always good news, the picture is far more nuanced than one might expect. Canadians buying overseas assets are among the biggest winners. Many investment advisors recommend that savers hold at least a part of their portfolios in foreign securities. Of that percentage, a big chunk usually ends up in shares of U.S. based companies. The good news is that, despite the fact that the Dow Jones Industrial Average has moved sideways for the past six months, you can now buy a lot more shares of U.S. companies for a given dollar amount, than you could at the start of the year.

 

The stronger loonie means that an investor who bought say $40,000 worth of U.S. stocks last week, would have gotten them about $6,000 cheaper than if he had bought them at the start of the year. That’s a lot of money. Canadians who are thinking of buying U.S. real estate would likely save even more money, because in addition to the rising loonie, they also benefit from the fact that house prices down south continue to drift downwards in most markets.

 

Exporters and the local tourism industry will suffer

For businesses, the effects of a strong Canadian dollar are far more mixed says St-Maurice. “Those that buy productivity enhancing high-technology, production and medical equipment much of which is made in the United States will be big winners,” says the veteran economist. “And Canadian east coast oil refineries, most of which import much of their crude inputs from Algeria and the North Sea will also benefit.”

 

However Canada’s exporters, particularly labour intensive manufacturers, stand to be hit hard. According to Avery Shenfeld and Krishen Rangasamy of CIBC World Markets, the manufacturing industries that will suffer the most negative effects from a strong loonie are sectors such as machinery, paper and electrical equipment producers.

 

Another big potential loser from the strong loonie is Canada’s domestic tourism industry, which saw its revenues slide by 3.1 percent during the first quarter to $13.6 billion. The industry, which employs 623,200 Canadians, has been hit because the strong loonie makes local purchases far more expensive for American tourists, who comprise the lion’s hare of travellers here.                                                        

 

What to do?

The big question that many Canadian consumers are now asking themselves is how they can best take advantage of the strong loonie. On piece of good news is that according to CIBC’s Shenfeld and Rangasamy, the loonie will likely trade in its present range at least until year end, so there is no rush to act now. The pair also note that according to the OECD’s estimate, current “fair,” value of the loonie, (as measured by purchasing power parity which equilibrates the cost of buying a basket of good in each country)  is about $0.82. That means the loonie is currently slightly overvalued. 

 

For now, that means Canadians can balance their potential savings from buying U.S. assets or imports, with what for many is a new found desire to put an increasing amount of their disposable income aside to protect them during current tough economic times.

 

However Canadians decide to act, it’s nice to know that they will be doing so with a little manoeuvre room.

 

Peter Diekmeyer is Bankrate.ca’s economics correspondent.

 

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