A higher Canadian dollar can hurt you in more ways than one

Now that the loonie has reached parity with the U.S. dollar, many Canadians are gleefully contemplating the potential benefits. A recent poll by The Montreal Gazette showed that over 80% of respondents thought a rising Canadian Dollar is a good thing. But is a higher valued loonie really in the best interests of Canadians? To answer this question, let’s first examine the potential benefits.

Now that the loonie has reached parity with the U.S. dollar, many Canadians are gleefully contemplating the potential benefits. A recent poll by The Montreal Gazette showed that over 80% of respondents thought a rising Canadian Dollar is a good thing. But is a higher valued loonie really in the best interests of Canadians?
To answer this question, let’s first examine the potential benefits. There are thousands of cross-border shopping Canadians who head to the U.S. to buy things ranging anywhere from groceries, to clothing, to airline tickets. The potential savings for the average consumer buying these items are enormous.
When you consider that just five years ago the Canadian dollar was worth about 62 cents versus the greenback, it’s an incredible turnaround that it’s now soared to, and is hovering close, to one dollar U.S.
To give an idea of how much the average consumer would save, picture how much a vacation to the U.S. would have cost you 5 years ago. Well, now you’d save almost 40%. That’s a lot of extra money in your pocket! But are these advantages applicable across the board? Could a higher valued loonie also hurt Canadians?
That is a distinct possibility, because the Canadian economy is export based. That means that the majority of the consumer goods we manufacture here are exported, with an overwhelming majority going to the U.S. That same 40% savings you’d gain on a vacation can be translated into a 40% net loss for Canadian manufacturers, because now those American dollars they are taking in as revenue are also worth that much less. Imagine you own a clothing manufacturing company, and all of a sudden you lose that much revenue. Almost half of your revenue would be gone; it might even put you out of business.
Couple with that with the increased cost for U.S. retailers to purchase these suddenly more expensive Canadian imports, and that translates into fewer orders placed. This could potentially lead to a serious economic slowdown, or even a recession.
And that would affect us all profoundly. If one sector of the Canadian economy slows down, other sectors would likely follow. As fewer goods are being sold, businesses would have little choice but to begin laying people off. Suddenly the savings on consumer items like groceries, clothes, airline tickets, and the vacations Canadians would have purchased in the U.S. wouldn’t really matter, because many of us wouldn’t be able to afford them.
From the 1950’s until the 1970’s, the Canadian dollar was traded at near equal value with the U.S. dollar. But in the mid-seventies, the Canadian dollar’s value began to plummet until reaching its low of 62 cents in 2003. It’s been argued that since the loonie used to be at par with the American Dollar, it shouldn’t be any more of a problem now.
But this argument doesn’t hold much weight because today the Canadian economy is structured much differently. While importers would be happy, with the inception of the Canada-U.S. Free Trade Agreement in 1988, and the North American Free Trade Agreement in 1994, we are now a much more export based economy. Our manufacturers have become heavily reliant on the American market to sell their products. The United States are by far our largest trading partner, and our two economies have become entwined and inter-dependant. The results of a shrinking exchange rate on this new economy could prove to be devastating for all Canadians in one way or another.
In any case, the loonie’s relentless upward surge seems unstoppable. Unless the American markets make an incredible turnaround, or Canadian markets cool considerably, we are likely to find out just what the effects of this shrinking exchange rate will really mean for the average Canadian. So before you go laughing all the way to the bank about how much you saved on your vacation to Florida, consider this: that vacation may have cost you a heck of a lot more than you think in the long run.

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