Corporate Canada is beginning to feel the effects of a plunging Canadian dollar, with some businesses raising prices – or making plans to do so – to account for the higher cost of U.S. goods.
The dollar slipped briefly below 90 cents (U.S.) on Thursday for the first time since 2009, closing the day at 90.10 cents. It has now dropped 9 per cent against the greenback since Stephen Poloz was named Bank of Canada governor in early May. It has also fallen against the euro, the pound and other currencies.
The loonie’s weakness will generally help exporters, hurt importers, push up fuel prices and make Canadians wince at the cost of international travel. Already, vacationers are feeling a hit. Sunwing Travel Group has said it will begin a $35 surcharge on all new vacation bookings as of Jan. 30, “a result of significant deflation of the Canadian dollar.” Air Canada Vacations will also apply a $35 surcharge on trips to the U.S., Mexico and Caribbean destinations for travel booked starting Jan. 27, and Transat AT Inc. will levy the same fee to Florida and other “sun” destinations.
Still, years of hedging and restructuring by the country’s businesses mean the impacts are small and isolated – at least so far.
Businesses that buy fuel and other products priced in U.S. dollars are poised to shift those higher costs to customers. Mike Pyle, CEO of Exchange Income Corp., a Winnipeg-based company that owns several regional airlines and small manufacturing operations, said his company will likely soon have to take action because its fuel costs are going to rise.
“We will ultimately have to pass that along,” he said, although “we are reticent to move too quickly ….. You’re not sure where this is going to settle out yet. It is still a moving target.”
Imported parts for the company’s aircraft, and for its manufacturing operations, will also rise in price because of the slumping loonie, he said, and it is very likely those higher costs will also be passed on to customers.
Retailers, who buy much of their inventory in U.S. dollars, will eventually have to pay more. But because of long purchasing lead times of about six to nine months, those higher costs may not show up to the consumer until later this year or next year.
David Russell, co-owner of fashion and sporting goods purveyor Sporting Life, said the chain is already purchasing goods for the winter of 2015, and those rates have already been set by suppliers. The weaker dollar, nevertheless, will probably mean higher prices on repeat orders. “It’s definitely going have an impact,” he said.
Amy Cole, a spokeswoman for Canadian Tire Corp. Ltd., said it buys its inventory almost six months in advance and has a comprehensive hedging program that moderates the impact of fluctuations in the dollar.
For many companies, the fall of the dollar has less impact than it once would have because they adopted hedging strategies or built operations outside of Canada in reaction to the dramatic gains in the loonie in recent years. After trading as low as 62 cents in 2002, the dollar rose to $1.10 with the U.S. buck in 2007, and has spent most of the past few years hovering at or just below parity.
Many Canadian manufacturers are no longer strictly importers or exporters, said Joy Nott, president of the Canadian Association of Importers and Exporters. They do both, and thus the effect of a sinking dollar are muted. “For most companies it is a balancing act. [The falling dollar] has a negative impact on their imports but a positive impact on their exports,” she said.
Even companies that are mainly importers may have significant amounts of inventory, and shouldn’t have to raise prices immediately, Ms. Nott said. They will also hesitate to shift prices until they are absolutely sure the dollar will remain relatively low.
“In don’t think anybody is going to want to send shock waves through their client base,” she said. “It won’t be a hastily-made decision to start raising prices.”
Bus maker New Flyer Industries Inc. of Winnipeg is typical of the new breed of Canadian manufacturer where dollar movements have less impact than in the past.
The company has production on both sides of the border, and it has a hedging program directly tied to its production schedule, said CEO Paul Soubry. Consequently, only much more dramatic fluctuations would cause concerns, he said. “If the dollar was crazy weak or crazy strong, sure, we would have to think about our cost structure.”
For some companies, the falling dollar is nothing but good news. Energy firms operating in Canada but selling their oil and gas in the U.S. – Canada’s largest export market – cheer the decline. It gives these operators the chance to pocket extra cash without having to lock in hedges. “The increase in cash flow does provide opportunity for incremental spending,” said Lorenzo Donadeo, CEO of Vermilion Energy Inc.
Cenovus Energy Inc., one of the country’s largest oil sands producers, already hedges in Canadian and U.S. dollars. “Generally speaking, a lower Canadian dollar may push us toward more Canadian dollar hedging, but the strength of the dollar is just one factor we consider in our strategy,” spokeswoman Jessica Wilkinson said.
Forestry firms based in Canada, which report in Canadian dollars, are also welcoming the weakening loonie.
“Lumber is largely denominated in U.S. dollars and as an export-oriented company, that has a net benefit to us as a Canadian-based manufacturer,” said Marty Juravsky, vice-president of corporate development and strategy at International Forest Products Ltd.
Interfor operates five B.C. mills and eight others south of the border. “We have mills in the United States, so the profitability of those in Canadian-dollar terms is also better,” Mr. Juravsky said.
The low dollar could also help keep Canadian tourism dollars in Canada. “It may curb some of the outbound business, so for example, for March break if you’re choosing between going to the Laurentians or going to Vermont, that 10-cent spread could keep you in Canada,” said David Goldstein, president and chief executive officer of the Tourism Industry Association of Canada.
With files from reporters Carrie Tait, Tavia Grant, Brent Jang and Iain MarlowReport Typo/Error
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- Updated December 8 3:50 PM EST. Delayed by at least 15 minutes.