Have you seen how strong our Loonie is? Currently it’s trading at a multi-year high against the weakening U.S. greenback. One Canadian dollar gets you about $1.06 U.S. WOW! What a difference a few years make. In 2002 our dollar was worth about 62 cents U.S. Right now, cross border shoppers couldn’t be happier. Let’s be frank, not only is it cheaper to shop across the border, we get to use our premium Canadian currency. And for those seeking retail therapy it’s only getting better. By all accounts the Canadian dollar could easily make it to $1.10 by the end of the summer, and that will mean more Canadians flocking to U.S. outlet malls.
But, it also means more pain for Canadian businesses trying to sell goods and services outside of the country.
Lets take a Canadian business that makes hats. Here’s how the conversation could go: Hey American cousin, I know you are suffering from record high unemployment, and possible tax hikes, but why not buy this chapeau for 10% more than what you paid last year? Hey Canadian cousin, not this year I can’t find a job and hats are the last thing on my mind. That really is how bad it is.
So, why is the Canadian dollar stronger? Mostly because the U.S. dollar is weaker. The ongoing stalemate between Democrats and Republicans on whether to raise the U.S. debt ceiling is not helping the situation. What America needs to do is borrow more to keep the country running. This means more American money will be printed and this will dilute its value making our dollar stronger. This essentially makes it harder for businesses to trade outside our border.
Last week Statistics Canada, released inflation numbers that were slightly lower than expected and slightly weaker than the month prior. But the number is still relatively high at 3.1%. The natural rate of inflation is around 2% no matter how you look at it, its getting more expensive to live in Canada and that’s pushing shoppers to buy in the U.S.
Here’s what has to happen, the U.S has to come to an agreement by August 2nd to raise the debt ceiling, the ratings agencies have to keep the U.S credit rating at triple-A and no European country can default. This should keep inflation in check, oil prices low and Canada’s economy still on the road to recovery. Eventually the Democrats and the Republicans will come to an agreement on raising the debt ceiling. This will allow the U.S. to pay its bills, at least for August.
In the meantime, don’t get excited about Canada’s inflation or our stronger dollar. This isn’t good news. Any driver gassing up today at a $1.30 a litre can tell you that. The world is still in a wait-and- see mode, on a number of issues. But one thing that hasn’t changed is Canada’s economy is still growing but remains vulnerable to what’s happening in the rest of the world.
So, when you go cross border shopping and get all those great fall clothes, remember the higher dollar will get you more stuff and higher inflation in Canada will make you feel better that you got a deal. But Canada’s economy could suffer its biggest blow if we continue at this same rate. Happy shopping!
Writer for RateSupermarket.ca