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At Issue
Rising Canadian Dollar Forcing Adjustments in the Local Economy
Tuesday, April 29, 2003
In the manufacturing plants and on the farms of Chatham-Kent, the rising value of the Canadian dollar is starting to put a huge crimp into how we do business. Last Friday, the Canadian dollar closed at .6909 cents, the highest close in several years. For those of us dependent on export markets in Chatham-Kent, the whiff of 70 cents US, has a particular pungent smell.It has been a long time coming. In retrospect, many of us had grown accustomed to a 62-cent world. With our free trade agreement now 14 years old, having a 62-cent dollar going into the United States made it easy for industries exporting to the United States. Whether you had auto parts coming out of Tilbury or Chatham, or hogs and sugar beets coming out of Wallaceburg, a 62 cent Canadian dollar made it easier. Now that it's 10% higher, the comfort zone is growing tantalizingly thin.
The reason for that has everything to do with our passion to export to the American market. They take over 80% of everything we export. So when the dollar rockets up, like it has, these products are more expensive. This in turn reduces the demand for our products, which eventually backs up into the plants and farms of Chatham-Kent.
Of course, it is a double-edged sword. Imports to Canada from the United States get that much cheaper. People returning from Florida will find their bills a bit cheaper in Canadian currency. Industrial equipment out of the United States gets cheaper. And our American friends who spend their tourist dollars in Chatham-Kent find it doesn't go as far. So as 70 cents gets a little closer, everybody will have to find their foreign exchange equilibrium.
Careers are built on these types of exchange rate ups and downs. But keep in mind that the Canadian economy is affected more by GDP growth in the United States than the strength or lack thereof of the Canadian dollar. According to BMO Nesbitt Burns, the long-term record clearly shows that the Canadian dollar plays a quiet second fiddle to the much more dominant factor of U.S. growth. They found that a 1 percentage point swing in U.S. GDP growth will prompt a 1.8% swing in Canadian exports, while it would require an 8.4% move in the Canadian dollar to have the same impact on exports. So in other words, we'd all better be praying for some buoyant US growth.
The dollar closed at over 69 cents after a topsy turvey Thursday. That's because the WHO was chiming in with their latest opinion about SARS. By now, we all know what that meant. The Bank of Canada, in its latest monetary report, said it was downgrading growth from three per cent to 2.5 per cent this year because of SARS. TD Bank, in another report, has estimated the potential economic cost at more than $2 billion. None of this should be friendly to the value of the Canadian dollar.
But it seems buoyant anyway. I don't know with SARS swirling around us, how long it can last. Keep in mind that the Canadian dollar is not foremost in every currency trader's mind. It is a "thinly" traded commodity, dear to us, but not so to anybody else. When there is trouble in this world, everybody runs toward the US dollar. In other words, if the right set of circumstances comes together, the same investors who send the loonie soaring could be looking for greener pastures. That’s just how fickle currency trading can be.
In 1987, I was a budding graduate student at the University of Guelph. I made arrangements to hear private citizen Jean Chretien speak. He was coming to the University at a time after he had resigned from parliament when John Turner was Liberal leader. That night he railed against the "proposed" free trade agreement. He said, why do we need a free trade agreement with the United States when the Canadian dollar is at 85 cents? 16 years later, it’s a mute point now that he's Prime Minister.
However, on that cold wintry 1987, even if you give him the benefit of the doubt, his thinking was an 85 cent dollar was a huge advantage. So sitting at 69 maybe isn't so bad. But, of course, it all has to do with what you've been used to. For those of us involved in businesses, which export to the United States, maybe the gravy train of foreign exchange is slowly disappearing.
Philip Shaw, farms 830 acres near Dresden, Ontario. He holds a Masters of Agricultural Economics and Business Degree from the University of Guelph and is a well-known commentator on agricultural issues in print, on radio and over satellite in Canada and the United States. In the Chatham-Kent Times, Phil will use his frank and forthright writing style to address political and economic issues from the local to the international stage. He is a keen observer of political life at all levels, reads widely and has travelled the world to gather fodder for his column. See what's At Issue this week.
