The conventional wisdom is that Ben Bernanke’s QE3 is bad news for Canadian exporters. Given the rapid rise in the Canadian dollar, this belief is understandable. Canadian businesses, however, should welcome the move.
The currency costs to Canadian exporters have been vastly overstated. The old-fashioned Canadian export model of “revenues in U.S. dollars, expenses in Canadian dollars” has been nearly extinct in Canada for at least half a decade, as firms have been forced to deal with the changing economic conditions or perish.
Canadian exporters have been quite creative in reducing their net transactional currency exposure, by either finding ways to denominate a larger portion of their expenses in U.S. dollars, or by diversifying their export markets.
The rise in the Canadian dollar by QE3 has also been overstated, as the currency is less than two cents higher (vis-à-vis the greenback) than it was a month ago. Talk that the continuing monetary injections of QE3 require that the Canadian dollar must continue to rise should be ignored.
Since this monetary stimulus is public knowledge, markets have already priced them into the valuation of the Canadian dollar, so to include them again is double counting, an insight brought to us by the efficient markets hypothesis. To believe that the Canadian dollar is undervalued, one must believe that traders in monetary markets are mispricing the effects of QE3; there is no obvious reason to hold that belief.
Judging QE3 solely by its effects on the Canadian dollar misses the main benefits of the program to Canadian exporters, as a stronger U.S. economy means increased U.S. demand for exports. While markets believe that the stimulus effects of QE3 will be relatively small, they do believe they will be positive and will strengthen the U.S. economy. But we also need to consider the spillover effect, as a stronger American economy also helps strengthen the economies of their trading partners such as the EU and China. All of this is good news for Canadian exporters and, as such, QE3 should be welcomed in Canada.
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