The global Canada craze is done.
Our plunging dollar makes it official. Foreign investors are selling their holdings in this country because they see better opportunities elsewhere. It's not all high finance in play here. The habits of everyday Canadians play a role, too.
Foreign investors used to look at Canada and see a rock of economic stability in an uncertain world. Now, they see an economy that has been fuelled in large part by an unsustainable run-up in debt. Housing market optimists may dispute this, but the pool of people able to take on big mortgages or draw way down on their lines of credit is shrinking. Less borrowing suggests less commerce, which is bad for a Canadian economy that is already running sluggishly enough to prompt concern about deflation, or falling prices.
The above-par heights reached by the dollar in recent years reflected the view that Canada was a much stronger proposition for investors than the United States. But in the past year, we've seen an accumulation of data showing the U.S. economy has more near-term upside than our economy.
The Canadian dollar hovered around 92 cents (U.S.) on Thursday, down roughly 9 per cent from its year-ago level of $1.01 (U.S.). We should regard this decline as both a comment on our excessive household debt levels in Canada, and a call to change some of our plans and expectations.
Snowbirds and people arranging trips to Florida or Arizona this winter, you should consider exchanging some of your Canadian dollars for U.S. currency now to protect yourself from further declines in the Canadian dollar. On the chance of a rally for the Canadian buck, save at least some of your money to exchange later.
The whole U.S. experience becomes less affordable to Canadians with our dollar where it is as 2014 begins, and not just for travel. A loonie in the 90-cent range is going to short-circuit all pressure on retailers and manufacturers to bring Canadian prices more in line with those in the United States. The two currencies were worth roughly the same amount for years, but we never did see retail prices here reflect that in a uniform way.
Unless the Canadian economy rebounds quickly and jolts our dollar higher, we might well be coming back to the days of all things American being quite a bit more expensive to us. If you've been thinking about importing a U.S. car to Canada or buying a U.S. vacation property, you should see if there's any cost benefit left.
Your investing plans should also consider what's happening with the dollar. Canadian companies relying on exports should do better in an environment where their products are falling in price, as measured in U.S. dollars.
If you hold U.S. stocks or funds, a falling dollar adds to your returns as long as you don't own anything that uses currency hedging. Hedged mutual funds and exchange-traded funds screen out the impact of currency changes, which means you lose out when our dollar falls but stay protected against losses in your investments when our dollar rises.
Rob Carrick