Parity Achieved. Now What?
When the Canadian dollar reached parity with the U.S. dollar last week, foreign exchange traders jumped off their desks and cheered. Literally. It took our dollar three decades to do so, which, I suppose, warranted a bit of celebrating. The chorus is likely to be joined soon by Canadian-dollar-happy consumers and just as happy importers. But what about those poor manufacturers, lumberjacks, and other exporters we’ve been harping on about for months now?
Although it is not an original thought, the editors and analysts of Lombardi Financial know and practice the money-can-be-made-in- any-market theory. This is why we like, for example, manufacturers who have figured out a way to protect their businesses through speculative and hedging investment activities.
We also like exporters who have kept on drilling their product designs and technological processes, finding new ways to reduce time and raw materials waste. And those who have managed to elevate their customer services to new levels not only attracted new customers, but also maintained very strong customer retention rates. All in the name of achieving revenues as high as possible.
Why is it so important for businesses adversely impacted by the soaring Canadian dollar to have ways and means of mitigating the circumstances? Simply, for every cent that the loonie increases, an estimated $1.5 billion in sales immediately flies out of collective manufacturers’ pockets. And in capital-sensitive industries, it is all about cash flow; both cash flow from operations and cash flow from free cash.
And, what would manufacturers, exporters and lumberjacks like to hear now? Well, a cut or two in interest rates would come in very handy. It would curb the loonie’s enthusiasm to an extent, although there would still be backlash in the form of higher price levels. I’m sure consumers would have liked lower rates, too, but with the loonie at par. Can they have their cake and eat it, too?
This is a tough one to answer. Based solely on the economic forces at play in Canada, the answer would be that interest rates are more likely to stay put or even go up, than to be reduced by the Bank of Canada. However, in this day and age, observing a country’s economy only within its macroeconomic context and without taking into consideration the impact of global economic pulls would provide for an incomplete analysis.
Canada cannot ignore that its largest trading partner is experiencing turmoil in its financial markets; that the U.S. economy is slowing down burdened by the decreasing supply of capital; that it is (not) dealing with huge trade and budget deficits; all the while levels of output have been steadily decreasing.
Canada has diverged significantly from the tandem economic performance with the U.S. of the past decades. Still, we haven’t floated away on our own separate island either, metaphorically speaking. Which is too bad, really; to put in all that effort and to succeed in achieving strong economic performance, only to be told that it was all because of rather than in spite of the weakening economic state of the U.S. economy.