A Nation of Loonie Losers?

(Madeline Drohan — Globe & Mail)

As the loonie traded at record levels against the U.S. dollar this week, the prophets of doom went into overdrive. “Fear mounts alongside soaring dollar,” declared the headline in my morning paper. “Soaring loonie fans fears of economic slowdown,” warned another. “Strong loonie raising alarms,” said a third, while a fourth bluntly stated, “High dollar hammers profits.”

The problem with all these headlines is that they tell only one side of the story. Yes, the loonie’s rapid ascent in the last five years has created losers. But it has created many winners, too. Too much focus on the first group will lead to a lot of bad decisions by consumers, companies and governments. We need to see the whole picture.

Let’s look at the losers for a moment, because even there the story is not as bleak as often portrayed. It is frequently stated that the Canadian economy is dependent on exports, especially exports to the United States, and that the higher dollar has made these goods uncompetitive south of the border.

So why isn’t the economy in a tailspin?

The importance of exports to the economy is overstated. The figure used for total exports includes the value of all those bits and pieces that are imported to Canada and used to produce a finished product, such as a car that is then exported. If you subtract the value of all those imported bits, the importance of exports to the overall economy drops, too.

We are not as dependent on the U.S. market as we used to be. Five years ago, the U.S. absorbed 84 per cent of Canadian exports. Now, it accounts for about 76 per cent, and even that number may be overstated because some Canadian goods enter the U.S. only to be shipped onwards to other countries.

The higher dollar has raised the price of Canadian goods in the U.S., but it has also reduced the price of U.S. imports to Canada. This represents a cost savings for companies on anything they import, whether it is a new computer system for the office, heavy machinery for mining, or components that are fitted into a manufactured good and then shipped southward again. These savings may not outweigh exporters’ losses, but they certainly cushion the blow.

Some lucky exporters have seen global prices and demand rise so high that the value of the Canadian dollar has not affected sales. They are making money, just not as much as they might have made had the dollar stayed low. Oil and gas falls into this category, as do a host of metals and minerals that China is consuming at a record rate.

Even a company like Research In Motion, which as a manufacturer based in Ontario would seem to be a certain loser according to conventional wisdom, has found a way to mitigate the damage of a rising dollar with currency hedging. Its financial strategy seems to be working. This week RIM shares soared so high that it became the largest company in Canada in market capitalization.

The point of all this is that even those fingered as surefire losers – exporters and manufacturers – do get some benefit from the loonie’s rise.
And then there are the winners to consider. Most Canadians buying U.S. goods these days are getting a better deal. This is not confined to cross-border shoppers (a phenomenon that has been exaggerated, both in numbers and in actual savings), but also includes Internet shoppers and even those whose travel takes them only as far as the local shopping mall, where retailers have begun reducing prices on products from the U.S.

Anyone who puts gas in the car or turns on the furnace for heat now that autumn has arrived is feeling the benefit of the strong loonie indirectly, because the rise in the value of the dollar has meant that fuel prices have not risen as high as they would have otherwise.

Companies catering to U.S.-bound travellers, such as airlines and travel agents, are seeing a nice boost to their bottom line. Companies thinking of making acquisitions south of the border, such as the banks, are finding it suddenly much more affordable. And governments and companies that have debt denominated in U.S. dollars have seen their debt payments decrease.

The benefits of a stronger currency are so widespread they are not easy to tot up and compare with the disadvantages. But they exist.

So the next time you read an alarmist headline about the dire effects of a strong Canadian dollar, take a deep breath. Yes, there are losers, but there are winners, too. Let’s keep that in perspective.