Loonie Moves in Mysterious Ways

Thursday, December 6th, 2007
By Inya Ivkovic, MA for Profit Confidential

For all the talk about high prices of the Canadian dollar, whatever the price of loonie might be, it will never be the right price…for one person or another. About five years ago, our dollar was trading at about $0.62 and everyone said it was priced too low. It took a while to rise from the ashes, but it was worth the ride. Not so long ago, the Canadian dollar traded at $1.10, and everyone said it was priced too high. Currently, the loonie has dipped below parity, but the proverbial “one person or another” still thinks it’s pushing into the nosebleed section.

But here’s the thing. Any country’s currency is always either above or below the level it “should” be at. In Canada’s current situation, when our loonie is trading lower, it’s bad news for consumers, importers and Canadian companies that might end up as targets of takeovers. Just don’t get caught up in the fallacy that if a currency is trading higher, it is good news. Because it isn’t! At the losing end this time around are manufacturers, exporters and Canadian firms, now unable to find buyers willing to pay top dollar (literally).

It seems that the loonie moves in mysterious ways. Well, perhaps not so mysterious, since all currencies appear more or less to bend to “Easterbrook’s Law,” which, according to the American journalist Gregg Easterbrook who apparently coined the phrase, states that “All economic news is bad.”

While the manufacturers and exporters are squealing that the dollar is too high and that the government’s intervention is needed, economists are saying that the dollar is what it is and where it has to be. Why “where it has to be?” Simply, Canada is a net exporter of oil and since oil prices are skyrocketing, why is everyone so surprised that our dollar is trading high as well? Now, let’s have a show of hands…who thinks oil is going to be trading at the “petro- dollars era” range of about $30.00 per barrel? Yes…thought so.

For some reason, manufacturers only acknowledge wage rates, the supply of skilled labor, productivity and raw material costs as relevant factors impacting their ability to compete. For some reason, they also believe that the dollar is something that parachuted onto Earth from outer space and can only be fixed if the government interferes(?).

Perhaps manufacturers should be sent back to Economics 101 class to learn that currencies, like all other assets, are predominantly defined and evaluated not based on “Easterbrook’s Law,” but based on the laws of supply and demand.

Also, if our loonie were not properly priced based on the underlying economic data and developments, there would be plenty of price anomalies. Because of the law of one price, the moment improper pricing occurs, arbitrageurs show up pursuing safe profit opportunities, thus pushing the price of the underlying assets closer to or back to their equilibrium.

So, while it may seem that our loony moves in mysterious ways, remember to do the only thing you can, which is to accept its price at its face value. This is because, in all likelihood, our dollar will not behave any differently, regardless of how much manufacturers might whine about it or complain about it to Ottawa.

Next Post: Subprime Bailout Here… But Will It Help the Stock Market?
Previous Post: The Stock Market Could Go Either Way

Tags: stock market