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After our dollar's strongest six-month performance ever against the U.S. currency, Canadians are scratching their heads and wondering: "What's in it for me?"
The answer: It depends.
It depends, for example, on whether you have to convert Canadian dollars into U.S. dollars to pay someone (congratulations), or other people are buying something from you in U.S. dollars (take a Valium).
In some cases, these opposing forces are tugging at the same person or company — say, a steel manufacturer selling pipe into the western United States (bad), while buying production equipment in the U.S. Northeast (good).
Whatever your situation, the dollar's rise was spectacular in the first half of 2003, up about 17 per cent against its U.S. counterpart. To put it in perspective, that's almost twice the increase in its best-ever previous year, 1988, when it gained 9 per cent.
The Canadian dollar closed yesterday at 74.57 cents (U.S.), almost unchanged on the day.
To make things a little less confusing — maybe — here are 20 ways the rise of the loonie is rippling across the Canadian landscape.
1. Prices will fall. The higher Canadian dollar could mean some lower consumer prices this year as retailers pay less for whatever they buy in U.S. dollars — and, according to the theory, pass on savings to shoppers.
Giant Wal-Mart Canada Corp., which tends to set price trends in this country, expects to cut prices later this year because of benefits from a strengthened Canadian currency, says Andrew Pelletier, a company spokesman.
"As our costs decline, we will pass those savings on to customers," he says, noting that there has been no immediate effect because supplies are ordered up to six months in advance.
Some furniture retailers, such as Brick Warehouse Corp., say they have already lowered prices as the currency has soared.
All this is supported by a Retail Council of Canada survey of its members, indicating that competitive pressures would force them to reduce prices rather than keep the savings they collect from the stronger currency.
2. Or prices won't fall. Don't expect any big change in one very important household cost — the price of food, says Toronto retail consultant Len Kubas. Groceries are already at attractive prices compared with U.S. products, he says, and Canadian grocers will probably absorb any benefit they get from the currency shift.
3. Loons and Jays. If you're a Canadian sports team owner, you're cheering the dollar's ascent because most expenses — mainly player salaries — are paid out in U.S. dollars while revenues — such as ticket prices — are largely in Canadian bucks.
Paul Godfrey, president and chief executive officer of the Toronto Blue Jays, has said the team saves about $400,000 (U.S.) for every 1-cent increase in the loonie's value. The Jays are one of a handful of Canadian teams that hedge their currency exposure, piggy-backing on the hedging program of team owner Rogers Communications Inc.
Consider this example: Slugger Carlos Delgado makes about $17-million a year. In January, 2002, when the loonie touched an all-time low of 61.75 cents, that contract worked out to about $27.5-million (Canadian) a year. Now, with the dollar floating above 74 cents (U.S.), the team's outlay is down to a measly $22.8-million (Canadian).
4. On the wrong track. The opposite equation confronts Canada's railways, which take in much of their revenue in U.S. currency.
Canadian Pacific Railway Ltd. recently announced another 520 job cuts to help the company remain competitive, bringing its total layoffs announced in 2003 to 820, or about 5 per cent of the work force. The moves will take effect by the end of 2004 and will save the company about $45-million.
It doesn't get better at Canadian National Railway Co., which says the strong dollar has cut more than $50-million from the company's revenue so far this year.
5. It's academic. The travails of railways might be a good case study for those fortunate Canadian business schools that are getting a boost in their ability to recruit faculty members. That's particularly important in the tight international brain market, with its shortage of graduating PhDs.
A junior finance professor in the United States can pull in a salary of $130,000 (U.S.). A year ago, that professor would have cost more than $200,000 (Canadian) to hire; today it's down to a piddling $174,000 and change.
But don't be surprised if business deans play down their new-found riches. They have long argued that on a purchasing power parity basis — which reflects the cost of a basket of goods and services in two different countries — the exchange rate has never been that bad. What's more, a soaring loonie may mean higher costs for some foreign students in Canada, and lower fees (in U.S. dollars converted to Canadian funds) for smart Canadians to study at Harvard or Wharton.
6. Travellers' blues. A stronger Canadian dollar is the last thing the Canadian travel industry needs as it already struggles with the fallout from severe acute respiratory syndrome. For years, our low dollar has kept Canadians at home and lured travellers from other countries, especially the United States. But now Canadians are expected to start straying farther from home while foreigners no longer see Canada as a bargain.
"Obviously currency has had an impact in the past," says Randy Williams, chief executive officer of the Tourism Industry Association of Canada. With SARS and a slow U.S. economy already crippling the industry, Mr. Williams says, a strong dollar is more bad news. "It's not good, that's for sure."
7. Homebodies. Only trouble is, the increase in Canadians holidaying abroad doesn't appear to be happening either. "We haven't seen any increase because of the dollar," one Toronto travel agent says. "Travel is not what it used to be at all." The travel business has slumped so badly this year, most industry observers say it will take more than a stronger dollar to get Canadians moving again.
In general, Canadians have been staying much closer to home ever since the Sept. 11, 2001, terrorist attacks, says Mr. Williams of the tourism association. But a stronger dollar might ultimately encourage Canadians to expand those short trips to the United States.
8. Income we don't trust. Income trusts helped sustain Bay Street through the bear market, and last year investors bought several new trusts that earn much of their revenue south of the border, but pay it to unitholders in Canadian dollars. One was the General Donlee Income Fund, a trust based on a company that makes military and aerospace equipment. Little more than a year after going public, General Donlee recently slashed its monthly payout by 24 per cent, blaming "the precipitous increase in the value of the Canadian dollar" and poor sales. Less than a week later, SFK Pulp Fund, which pays out cash earned through a Quebec pulp mill, chopped its distribution by 25 per cent. The chief culprit: again, a stronger dollar.
9. Loonie liabilities. The Canadian dollar's sharp rise had an immediate impact on Canada's investment position with the rest of the world, because Statistics Canada revalues all such investments — many of which are denominated in U.S. dollars and other foreign currencies — at the end of each quarter.
Both the assets we own abroad and the liabilities we owe to foreigners dropped in value, but the former fell a lot more than the latter. That's because most of the assets, but less than half of the liabilities, are in other currencies. The result: Our net liabilities increased to $210-billion from $184-billion.
Even so, net liabilities amounted to only 17.4 per cent of gross domestic product, a bit worse than the 15.6-per-cent mark at the end of last year, but still well below the record of 44.3 per cent set nine years ago.
10. Factories take a hit. The folks on the front lines of the dollar wars are Canada's factory operators, who face a tough sell in the United States since the sharp rise in the loonie has boosted the cost of their products.
Manufacturers are scrambling to adjust to the loonie's 17-per-cent surge this year, with profit margins under pressure and employment flagging, says Stéfane Marion, assistant chief economist at National Bank of Canada. Over the past six months, 66,000 factory jobs have been lost, which is almost half of the manufacturing jobs created since late 2001. For the first time in three years Canada is losing more factory jobs than the United States.
Few feel the pinch more than Stelco Inc., already coping with rising costs and lower prices — and now this. The Hamilton-based steel maker recently issued a profit warning predicting a second-quarter loss of 83 to 92 cents a share. The dollar's rise is responsible for 12 to 20 cents of that loss, one analyst estimated.
11. Other side of the coin. But the rise in the dollar also reduces the cost of investing in new machinery and equipment. Canadian businesses import somewhere between 70 and 80 per cent of their equipment and software from the United States, so the lower cost will encourage firms to make investments that will boost productivity in the years ahead.
12. Cross-border conundrum. Canadian shoppers aren't flocking south of the border to shop — yet. In fact, the number of Canadians heading over the border for one-day trips — a measure of cross-border shopping — has been falling over the past few months, says Katherine de Vos, a spokeswoman for Canada Customs and Revenue Agency.
Consultant Len Kubas points out that the gap between the Canadian and U.S. dollar is still substantial, and prices in Canada are relatively good compared with those south of the border.
Also, Wal-Mart Canada has had a ripple effect on rivals, forcing them to lower prices, he says. And many Canadians don't want to be bothered crossing the border because of stricter security and longer lineups.
Still, you can almost feel the pent-up purchasing power of diehard border shoppers who are itching to hit the U.S. outlets if the Canadian dollar edges up some more.
13. That's not entertainment. Add the rising dollar to a host of afflictions battering the film and TV production industry. This labour-intensive business is also being hit by the SARS outbreak, U.S. tax incentives and just plain old-fashioned Yankee patriotism, the Canadian Film and Television Production Association reports.
"The currency issue is crucial and there are ways for [U.S.] regional film commissions to respond," says Elizabeth MacDonald, CFTPA president and chief executive officer. For example, North Carolina's Wilmington Regional Film Commission cited the rising Canadian dollar in its successful wooing of the Warner Bros.' new TV basketball drama, One Tree Hill. The loser? Vancouver. But while Canadian production is being hit, the loonie's flight has little impact on Canadian TV broadcasters' appetite for U.S. programming — which is paid for in Canadian dollars, not in U.S. greenbacks. A much bigger factor in that market is the big-bucks competition for hit shows between rival networks CTV and Global, along with smaller broadcasters CHUM Ltd. and Craig Media Inc.
14. Ouch. If you have a U.S.-dollar bank account or a sock full of U.S. cash, you may wish you had swapped it for Canadian dollars 17 months ago, when a U.S. dollar was worth nearly $1.62 before bank charges. It was the greenback's best rate yet — or the Canadian dollar's worst.
With the rate now down to about $1.34, you stand to receive almost $28 less for each $100 (U.S.) you exchange.
15. More ouch. The soaring Canadian dollar isn't just sucking cash out of company coffers — it's pulling it right out of the pockets of the company's shareholders. Investors in Abitibi-Consolidated Inc. got a painful lesson in the economics of currency fluctuations when the Montreal-based forestry giant recently dropped a bombshell — a 75-per-cent cut to its dividend in an effort to preserve precious cash. Like many resource companies, Abitibi peddles its paper products in markets where prices are generally set in U.S. dollars. That would be great if, as in the past, the greenback was strengthening. Not so these days. The rising loonie means U.S.-dollar-denominated sales are worth less once converted back into loonies.
16. The pain is mutual. The Dow Jones industrial average may have risen almost 9 per cent so far this year, the Standard & Poor's 500-stock index 12 per cent and the Nasdaq Stock Market's index more than 24 per cent — but the bull market hasn't found its way to Canadian investors with money tied up in U.S. equity mutual funds.
The average U.S. equity fund offered by Canadian mutual fund companies managed to gain about 11 per cent in the first half, which, while lagging some of the major U.S. stock indexes, was a refreshing improvement after a three-year bear market. But once those returns were converted into Canadian dollars, the average fund actually lost 3.4 per cent. Thanks to the Canadian currency, the bear still hasn't gone into hibernation.
17. What's bugging goldbugs? A similarly mixed blessing faces Canadian gold producers. The U.S. greenback's weakness has made U.S.-dollar-denominated gold more affordable for foreign buyers and helped drive gold prices higher earlier this year. Gold, which languished below $350 (U.S.) for much of the past decade, soared to six-year highs of almost $380 in February, but has fallen in recent weeks and closed at $351.30 yesterday.
Even as they cheered a higher gold price, which now looks more wobbly, producers stewed over currency fluctuations. Most Canadian gold producers report in U.S. dollars, so a stronger loonie is reflected in higher operating costs. The hit depends on how much production a company has in Canada — mid-tier producer Agnico-Eagle Mines Ltd., for example, mines all its gold in Quebec, but senior producer Placer Dome Inc. takes 18 per cent of its production out of Canada. Barrick Gold Corp. says it hedged its Canadian dollar exposure and has not been affected.
18. Flagging interest. Typically, interest rates affect the loonie — but the raging loonie is also putting a lid on rates.
When Canadian rates are substantially higher than those in the United States, money moves to Canada seeking higher returns. In the first four months of this year, the dollar's rise was propelled in part by the fact that non-Canadian investors pumped $13.3-billion (Canadian) into Canadian securities, compared with $5-billion during the same period in 2002. At the same time, our own investors lost their appetite for foreign stocks and bonds.
And how about that rate outlook? The Bank of Canada increased its benchmark overnight rate in both March and April — lifting it to 3.25 per cent from 2.75 per cent — and was expected to raise it even further as the year wore on. But such talk stopped in May when the loonie really took off. In June, the central bank left the rate unchanged, citing — among other things — the dollar's strength.
Since the dollar has continued rising, there is even speculation these days that the Bank of Canada will cut its key rate — if not on July 15, its next opportunity, then on Sept. 3, the one that follows.
19. In debt to the dollar. The surging loonie is great news for Canadian companies with debt denominated in U.S. dollars — and a cause for confusion among their investors.
First, the good news. A firm with U.S.-dollar debt effectively sees the size of its liability shrink as the Canadian currency rises. If the currency appreciation happens when a debt comes due, the company can end up paying ou
Contributions by reporters Richard Bloom, Patrick Brethour, Keith Damsell, Jordan Heath-Rawlings, Bruce Little, Gordon Pitts, Allan Robinson, John Saunders, Marian Stinson, Marina Strauss, Wendy Stueck and Paul Waldie