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At Issue
Don't Ever Believe Foreign Exchange Fluctuations Are Mundane
Tuesday, October 14, 2003
Where has our 62-cent world gone? It seems like only yesterday our Canadian dollar was trading in the 62-cent range. Export related businesses in Chatham-Kent, whether they are in the automotive or agricultural sector, were humming. Now that the loonie is pushing over 75 cents, a little foreign exchange heartburn is setting in.From an economic perspective, nothing is the same. Sure, if you want to visit "the states" you get more for your money. But if you are like many Canadians who depend on the US export market for their livelihood, the rise in the Canadian dollar means the goods you export are more expensive to American buyers. As those costs rise, American demand dries up. It's a vicious cycle, especially for Canadians because we export about 80% of what we produce to the United States.
It's become "in vogue" within economic circles to predict where the dollar is going next. In many ways, it's almost a self-fulfilling prophecy. As the dollar has surged over the last year, everybody likes to get on the bandwagon. All the big boys, like BMO Nesbit Burns, the CIBC and other are openly musing about the loonie breaking through the 80 cent US barrier.
It's almost like they are all in the same sailboat, hoping to catch some more wind. None of them predicted the meteoric rise of the loonie. Why should we believe them now? It takes no guts to predict an 80-cent loonie. On the other hand, it takes real guts to say the dollar going back to 68 cents. Who do you trust? Who will be right?
Don't look to me. I didn't predict the rapid rise of the Canadian currency. I didn't realize the Americans paralyzed at the thought of deflation would aggressively cut interest rates. Federal reserve chairman Alan Greenspan has been so aggressive, he only has a few basis points left on the Federal Reserve rate. This along with 9/11 and the Iraq war have sent the American greenback plummeting. The Canadian dollar has benefited greatly from that.
The other factor which has benefited the loonie is the healthy spread in interest rates between the US and Canada. The Bank of Canada governor, David Dodge, for the longest time, thought there was an inflation bogie man under every Canadian bed. He kept interest rates high, raising them several times over the last year. With Greenspan cutting at the same time, these Canadian rate hikes were untenable. In July 2003, the Bank of Canada finally relented and cut rates. In the meantime, the loonie soared.
It's getting to the point now where economic growth could be threatened. In other words, as the value of our dollar goes up, Canadian goods in export markets become more expensive
Canadian jobs are lost, and the political grumbling starts anew. Where this level starts and ends is another question. But I think we are very close to it. If the dollar does reach 80 cents any time soon, there will be a lot of political pressure on the Bank of Canada to cut interest rates. That would at least temporarily take the steam out of the loonie.
The evolving political environment in Canada will also play a part in the value of the Canadian dollar. Think of what is happening now in Ontario. Next week, there will be a new Premier and new provincial cabinet. The winds of change are blowing. At the same time in Ottawa, Paul Martin is set to take power and he will have many new faces in his federal cabinet. This surely will mean a new relationship with the Bank of Canada governor.
For the autoworker, tourist operator and farmers within Chatham-Kent, all of this will have a huge impact on their lives. Yes, economic growth forecasts are still high for the Canadian economy, 3% in the fourth quarter we're in now and even higher in 2004. But keep in mind it is a delicate balancing act. If the dollar continues to rise rapidly, those growth forecasts could be compromised. Getting used to an 80-cent world won't be as easy as it was at 62 cents.
It will be a world of adjustments. Greenhouse construction in Chatham-Kent, which was based on a 65-cent dollar, will have to be re-evaluated. Auto-parts going into US markets might be outsourced to other locales. Mortgages will need to be renegotiated. Travel plans will change. At the end of the day, we will survive. But don't ever believe foreign exchange fluctuations are mundane. They change lives. All you have to do is take a look around.
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.
