What’s up with the Dollar, eh?
We all have our family stories that are retold countless amounts of times during the holiday seasons. In fact, over the years they have adapted a sense of fairy tale like characteristics. Grandpa would tell me about his 10-mile hike to school each day in the dead of the winter. Snow banks 10-feet high, minus 30 degree weather and the trip was up hill both ways. Grandma would talk about the power of a nickel and how many loaves of bread she could buy with it. My parents would recollect on how the Canadian dollar was worth more than the American. Well maybe their not all fairy tales!
For the first time in 31 years the Canuck buck has traded at par with the Greenback. The loonie has risen on the back of a robust global growth period along with a significantly appreciated commodity market.
The Canadian dollar is very pro-cyclical, doing well in periods of global expansion but faring worse in periods of decline. Accordingly, with global growth expected to slow we could see the Canadian dollar begin to under-perform in the early stages of 2008. However, this is more of a medium term story as, for now anyways, the market appears to be quite content to ignore the implications of slowing growth on the Canadian dollar.
What does this all mean? If you are a snowbird or are heading south of the border, the strong dollar will decrease vacationing cost. Certainly imported good’s will be cheaper for Canadians to buy. From a political standpoint, a strong dollar is also a source of national pride.
The soaring dollar hasn’t exactly fared well for all Canadians. The vast manufacturing sector and those in the export business have landed in the middle of tough times. The cost of Canadian goods is much higher abroad, making it more difficult for our producers to compete on price. With the majority of our exports heading to the United States, the weak greenback may have the American’s looking elsewhere for their imports.
The chart below highlights that though the recent decline in the US dollar has been drastic, it is in context with the previous moves we have seen over the last 5 years. The USD/CAD is down roughly 16%, which should history repeat itself also calls for a period of consolidation before the downtrend continues.