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Shopping in America: Canadian dollar's dive to 'chill' our favourite pastime

These are stories Report on Business is following Friday, Jan. 24, 2014.

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Cross-border 'chill'
The violent drop in the loonie promises to keep Canadians from one of their favourite pastimes, shopping in America.

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Given that the Canadian dollar now buys about 10 cents less than it did a year ago, the plunge to the 90-cent range "will put an abrupt and sizeable chill into cross-border shopping," Bank of Montreal's chief economist projects.

Douglas Porter, who has been tracking Canadian vs. U.S. prices for years, estimated in the past that an 88-cent loonie, as the country's dollar coin is known, would "roughly equalize" prices on a selection of products in both countries when measured at that value for the currency.

"Here we suddenly find ourselves quite close to that figure, suggesting it simply does not pay for the average person to make the trip any longer (and put up with the border hassle," Mr. Porter said.

"Certainly there will always be some folks who will make the trip south," he added.

"But the extreme skew between Canadians travelling to the U.S. versus Americans travelling to Canada (nearly a 3:1 ratio last year) is about to come down with a thud."

The latest reading from Statistics Canada showed that, a few cents ago in November, same-day car trips by Canadians to the U.S. rose by 1.3 per cent from October. That's generally a good measure of cross-border shopping.

Emerging markets in turmoil
Emerging markets are taking it on the chin, and investors are fretting over whether it could spread from the most troubled countries.

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"Argentina, Turkey and South Africa are under tremendous pressure which has yet to ease," chief currency strategist Camilla Sutton of Bank of Nova Scotia warned of the currency turmoil.

"Outside of the most vulnerable, there are limited signs of a panic; there has been a reaction in the sense that other EM currencies have weakened; however, to date most of the concern continues to lie with the most vulnerable. Markets are nervous and watching closely for signs of contagion."

Stephen Gallo, the European chief of foreign exchange strategy at Bank of Montreal, cited the trouble as a "real concern," even among central bankers in the developed economies.

"QE is a large part of the problem," Mr. Gallo said, referring to the pullback by the Federal Reserve in its bond-buying stimulus program known as quantitative easing.

"Also, the lack of structural soundness and impetus for structural reform are also factors in many of these EM countries," he added.

"Another issue is the term BRIC. When QE started in 2009, major financial institutions sold their clients the idea of investing in BRIC because the QE money was cheap and because it was a great 'package' to sell: 'Buy BRIC.' It was a no-brainer."

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He was referring to Brazil, Russia, India and China, the great hope among many until recently.

"A lot of people got long of BRIC when asset prices were probably overvalued," Mr. Gallo said. "What you are seeing is the result."

That result included a collapse in the Argentine peso, which plunged after the country's central bank abandoned its support.

"Combined with sharp moves in other emerging markets including Turkey and Ukraine, which feature political problems of their own, the developments in Argentina and Venezuela morphed into a full blown liquidation yesterday that seems to be continuing today," added Derek Holt and Dov Zigler of Scotiabank.
"While the events may be unique and their causes unique, they all have a single factor in common: The most difficult challenges faced in emerging markets countries are becoming less sustainable in an environment of rising interest rates globally."

Inflation perks up
Canada's annual inflation rate is picking up, but largely on higher prices at the gas pump and still low from a central banking point of view, underscoring the Bank of Canada's concerns.

Consumer prices rose 1.2 per cent in December on an annual basis, a faster pace than November's 0.9 per cent, Statistics Canada said Friday.

The rise in the pace of inflation was primarily driven by higher prices for gasoline, which surged 4.7 per cent. When you strip out the impact of that, consumer prices rose 1.1 per cent annually, though also faster than November's 1 per cent, the federal agency said.

So-called core prices, which exclude volatile items and help guide the Bank of Canada, increased by 1.3 per cent, again at a greater pace than the 1.1 per cent in November.

Stubbornly low inflation has become the focus of the central bank, which earlier in the week sparked a plunge in the Canadian dollar with a rate announcement and monetary policy report that, while giving no signal on interest rates, still left the door open to a cut.

At the very least, the central bank's benchmark overnight rate, at 1 per cent, is now seen to be on hold for longer.

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