Canada Has A Low Loonie – But That’s Good News!

Why a Canadian low Loonie is good news for the economy.

Strong economic reports in the U.S. have sent the greenback higher and further weakened the Canadian dollar. Today, one Loonie will buy you 91 U.S. cents. This is a four-year low for our currency – in fact, it has dropped 3.1 per cent since the start of the year. But a low Loonie is a good thing – except for cross-border shoppers and travellers.

The dollar has been close to parity for more than three years, which has hurt our manufacturing and export industries. Along with the rest of the world, Canada has struggled to recover from the financial meltdown in 2008. Having the extra burden of an expensive currency has created more obstacles for already suffering businesses. Here’s what a lower dollar means for Canada and what we can expect going forward.

Relief For Exporters

Anyone in Canada who sells goods and services across the border is relieved to see a lower dollar. This makes their business more attractive and cheaper to international customers. Our biggest trading partner is the United States. Compared to a year ago, our dollar now means an almost a 10 per cent discount for an American business buying here. This could mean manufacturers can sell more of the same product or service and enjoy longer contracts, as U.S. partners will feel confident locking in at this lower rate.

Too High For Too Long

Granted, Canada’s economic recovery has fared better than the rest of the world, but our growth has still been tepid and slower than anticipated. One of the reasons has been the strong Loonie. It’s made it impossible for business activity to pick up. Canada has qualified workers and a large amount of resources to sell but without buyers it is impossible to revive many of our industries. This includes the automotive industry, which was badly affected with layoffs and plant closures following the Great Recession and 2008 economic crisis.

Travel Costs Slightly Higher, But Still Reasonable

One of the first industries to be affected is travel. Canadians who are planning a trip later this year can except to pay more for their flight and hotel as most tickets and accommodations are priced in American dollars or measured against it. Cross border shoppers may be less inclined to pull out their credit cards when they are south of the border as the deals won’t seem as good when you add 10 per cent to each transaction. But this still translates good news for Canadian business, as less travel means Canadian dollars stay at home.

Higher Interest Rates?

If the weakened dollar proves to boost the economy sufficiently, it is possible rates could rise. However, Bank of Canada Governor Stephen Poloz has indicated he’s in no rush to do so, until economic data supports such a move.

With the Canadian economy in better shape, employment levels back to normal, and now a lower dollar, this could be the perfect opportunity for Poloz to raise rates without causing disruption. When interest rates rise the dollar will get stronger, but now the economy is in a better position to absorb that change. This was impossible when the dollar was at parity.

Higher rates will also mean better return on fixed investments for Canadians. Many who are still concerned about putting money into the stock market may find better opportunities in a higher interest rate environment.  Higher interest rates will also help calm fears over inflation. Cheaper money makes it harder to predict how prices will be affected. There are many worried about the Canadian dollar falling lower, but on the most part this is the best place for the dollar to be for our economy to move forward.

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