To the Editor: Canada's mighty flying currency kicked off 2011 on an undeniably strong note, hitting the highest levels observed since the 2008 meltdown and averaging $U.S. 1.01 so far this year.
Considering where the loonie was for most of 2007 and 2008, Canadians have become more accustomed to a loonie flirting with parity vis-à-vis the U.S. dollar, the current value of the loonie is far from its traditional level. And while we all know the strong loonie creates headwinds for the Canadian economy, it also provides some unique and special opportunities that Canadian businesses should take advantage of while they exist.
There has only been two times since free-floating exchange rates were introduced in the early 1970s that the loonie was at par with the U.S. greenback. The first was during the commodity price boom of the 1970s when OPEC curtailed oil supply, sending crude prices skyward, and the second was the recent commodity boom of the last seven odd years. Considering how rare parity has been in the past it is naive to believe that this time is different.
It may also be surprising to hear that, in terms of annual averages, 2010 (average value of 97.1) was the strongest year for the loonie of the recent cycle. Even during 2007 and 2008, when commodity prices climbed to surreal levels and the loonie touched almost $U.S. 1.10, the loonie only averaged 93.5 and 94.4 respectively versus the U.S. dollar. It was only for an 11 month period (September 2007 to July 2008) when the loonie stayed above 95 U.S. With the loonie averaging above parity so far in 2011, opportunities are particularly lucrative.
It has been fairly engrained in most Canadians that, even though we feel a sense of national pride when our loonie rises above the U.S. dollar, it is generally bad for our economy. However, given the current state of the U.S. economy and their government finances, the loonie is going to be strong and not even tough talk from the central bank can change that. But that doesn't mean that Canadian businesses and consumers can't enjoy some of the fruits of a high currency.
The upsides of the lofty loonie to everyday citizens are more apparent, particularly in an age of Internet shopping and abundant foreign travel. However, the benefits of a strong currency goes beyond cheap clothes on Ebay and books on Amazon.com - it extends to every single product that Canada imports. Prices of everything from food at the supermarket to automobiles will be lower (cars have, in the past, been much cheaper in the U.S.). Maybe if the loonie is at par for long enough books and magazines will have a joint "North America" price as opposed to a typical $U.S. 4.95 / $CAD 6.95 type differential.
The loonie's gain in 2010 has been much slower than in 2007, and it appears as though it has some staying power. Considering that the Bank of Canada (BoC) contends that it takes 18 months for the impacts of currency changes to fully work their way through the economy, the current rise could lead to more substantial changes in end-consumer prices. In fact, the changes will probably be large enough to affect overall inflation, which would also leave room for the BoC to leaves rates lower for longer than otherwise.
Times like right now can also be a great for investors. With a loonie at parity and U.S. stocks still fairly cheap, many U.S. equities are as cheap as they have ever been for Canadians to buy. This same goes for stocks of emerging market countries whose currencies are pegged to the U.S. dollar. Yes, the TSX has been the place to be for much of the 2000s, but that may not last forever. And if/when that does become clear the loonie will probably already have fallen.
On the business side of the equation, the strong loonie also creates opportunities to invest in machinery and equipment. For a long time now, productivity data has shown that Canada lags significantly behind the U.S. in terms of productivity. The data also shows that we invest less in research and development, information technology and high-tech manufacturing equipment. The strong loonie makes these investments much more affordable. Companies should take advantage while there is a currency discount, and that way, if/when the loonie finally succumbs to gravity, companies will not only have a currency advantage but will have the best equipment to work with.
The world has gone through commodity booms before, and every time they have petered off. What are the chances that this time around will be the one that's different? If it isn't, the loonie really only has one direction to go in the long run: down. Consumers and businesses should embrace the currently high loonie, and make the most of parity, while it lasts.
Todd Hirsch, Troy Media Corporation.
