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The loonie’s cross-border lure

More and more Canadian consumers and travellers have been spending time south of the border because the loonie, before its recent sharp decline, was one of the top-performing currencies against the U.S. dollar in September.

The number of Canadians visiting the United States for an overnight stay or longer reached an all-time high in the summer, notes Bank of Montreal economist Douglas Porter. The robust Canadian dollar appeared to let people extend their U.S. stay and take advantage of increased duty-free benefits for longer visits, Mr. Porter says in a recent report.

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The close correlation between visits and the value of the Canadian dollar is an indication of how closely Canadians respond to incentives, writes Mr. Porter.

With the recent snap in the Canadian dollar’s lofty flight path, cross-border activity may start to ebb a bit, he says. The loonie is falling as mounting fears over a global recession push investors to the U.S. dollar, which is still perceived as a haven in a higher-risk economic climate. Falling commodity prices are also hurting the loonie.

Stronger U.S. banks

As fears rise that we are on the cusp of another recession, some observers have been drawing parallels between the U.S. housing crash that triggered the meltdown three years ago and the current European sovereign debt crisis. Yet there are also many differences indicating that the United States, at least, is in better shape to deal with the fallout from a European debt crisis or a double-dip recession.

For one, corporate America is stronger and U.S. banks are in a much better position to withstand a major slump this time around, says Ryan Lewenza of TD Waterhouse.

He bases his view on the banks on three key elements: U.S. financial institutions have issued about $500-billion (U.S.) of capital since the start of the credit crisis; they have also been steadily bolstering their capital ratios since 2008; and they have shed or reduced higher-risk divisions such as proprietary trading.

“Clearly, if the U.S. experiences some contagion effects from Europe, then U.S. financials will be negatively impacted; however given these improvements, we believe they are better positioned to handle any potential shocks that may occur.”

A turn to realism

Consumer confidence in Canada remains below pre-recession levels. But for most of the decade, consumer confidence was much higher than what would be expected based on households’ economic fundamentals, says Avery Shenfeld of CIBC World Markets.

The recession and recovery that followed helped bring consumers’ confidence levels more in line with their actual spending power, he notes.

To better gauge household spending capabilities, Mr. Shenfeld blended seven macroeconomic indicators into a single consumer index that measures their capacity to continue spending.

At the second quarter of 2011, the index was back to its pre-recession level.

“This suggests that consumers are much more realistic today with regard to their spending capacity than they were before the recession.”

The increase in the debt-to-income ratio is slowing, while the savings rate is double the rate tracked before the recession.

“While consumers will continue to take advantage of historically low borrowing costs, the practical implication of their more realistic approach is that the trajectory of consumer spending in the near future will be of slower but more balanced growth, as it will be based on fundamentals as opposed to wishful thinking.”

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