Jul 25, 2017
Pattie Lovett-Reid: The pros and cons of a rising loonie
The Canadian dollar has been trending higher since the Deputy Bank of Canada Governor Carolyn Wilkins hinted back on June 12 that rates could start to go higher. Since then, it’s up 6.5 per cent and then of course the Bank of Canada raised rates by a quarter of a per cent earlier this month.
The last time the dollar crested 80 cents US was July 1, 2015 and the last close over 80 cents U.S. was back on June 30, 2015.
There are a couple of factors supporting the dollar’s climb:
• Oil is higher – above US$46 per barrel.
• The IMF upgraded its outlook for the Canadian economy on the back of strength already seen in the first quarter – they now see growth for 2017 coming in at 2.5 per cent up from 1.9 per cent
• Wholesale trade hit a record high in May. The gains were fairly broad based with auto parts leading the charge which should bode well for second-quarter growth
Right now, the odds of further rate hikes by the BoC stand at a 77 per cent chance in October and a 79 per cent chance in December.
When the dollar heads higher, Canadians often use the opportunity to make cross-border shopping trips or travel outside the country. Snowbirds benefit as Canadians planning their winter escape to the southern U.S. will have their money go further. Travellers are less likely to cut back their trips and spend more enjoying the warmer climates.
A strong loonie makes it more expensive for Canadian manufacturers and exporters to sell their goods — everything from lumber to auto parts – south of the border Exporters clearly would prefer a lower dollar but dealing with a fluctuating currency can also be a challenge.
A rising loonie makes it cheaper for Canadians to import goods from the U.S. Industry and companies often use the opportunity to purchase cheaper U.S. technology that in turn can improve productivity.
Investors also face a currency risk when the loonie is strong. Even if a stock price nominally rises in U.S. dollar terms, Canadian owners of the stock can find their returns reduced or even eliminated once the market value is converted to Canadian dollars. In that case, financial advisers sometimes recommend hedging investments through tools such as exchange-traded funds to offset the effects of changing currency valuations.
The question for now is: how long will the dollar hang out at the 80-cent level?
