It was only two months ago that the loonie was worth a mere 73 cents U.S. How things have changed since then.
The Canadian dollar has been hovering around 80 cents U.S. for the past week or so, a remarkable 10 per cent climb since May.
And economists think Canada’s currency could stay at this level for a while.
“We expect the Canadian dollar to hold at around 79 U.S. cents through 2018,” Dina Ignjatovic, at TD Economics, wrote in a note to clients on July 28.
But is this rapid ascent of the loonie good or bad for Canadians and the economy? It depends.
Consumers: Canadian households are the one group for which a stronger loonie is “unambiguously good,” said Benjamin Reitzes of BMO Capital Markets Economics. A better exchange rate means the buck goes further for Canadian companies that buy goods from abroad, which generally translates into lower prices for consumers. There’s another considerable perk: Travelling abroad just became far cheaper. If you’ve been holding off on that dream vacation to Hawaii, now you might be able to afford it (and the same holds for many other destinations outside the U.S.). There are also implications for interest rates. The impact of an appreciating loonie on the economy is, in many respects, similar to that of higher interest rates. So could the recent currency move keep the Bank of Canada (BoC) from hiking interest rates again? Reitzes believes the central bank will still go ahead with a widely expected second rate increase in October. However, it may hold off from further increases after that. However, economists at TD still expect the BoC to raise rates twice more in 2018.
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Exporters: The conventional wisdom is that when the loonie rises, Canada’s exporters suffer, as their goods become more expensive and less competitive. However, that isn’t necessarily true anymore, said Reitzes. The Canadian dollar kept weakening between 2012 and 2016, but this failed to give Canadian exports a boost, he noted. So it’s unclear whether a strengthening loonie will have any significant impact, either. In general, the relationship between currency movements and exports has become less obvious, as more and more Canadian companies rely heavily on imported parts, which become cheaper when the Canadian dollar strengthens.
The resource sector: Mining companies, oil and gas producers and farmers are among the exporters that don’t use a lot of imported parts. Here, too, though, the impact of a higher loonie isn’t clear cut, said Reitzes. Most of the commodities Canada exports are priced in U.S. dollars, which means Canadians producers will get fewer loonies for every $1 U.S. they sell. On the other hand, a weaker greenback could boost global demand for commodities, including Canada’s.
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