Strength of the Canadian Dollar

Canadian Dollar

The Canadian Dollar has appreciated dramatically over the past 6 months compared to the greenback. Economists at TD Bank suggested in a report dated July 12, 2007 that the strength of the Canadian dollar will help to limit Bank of Canada rate hikes through the coming quarters. However, their report also predicted another quarter point raise to come in September as a direct result of stronger economic growth and elevated inflation. TD added that “the strength in the Canadian dollar should not only help reign in inflation by restraining economic growth and import prices, but [they] feel it will also limit the degree to which the Bank needs to hike rates.”

WHAT’S BEHIND THE SORING CANADIAN DOLLAR?

Graph of Canadian $ vs. U.S. $

Struggles of the U.S. Economy: budget and trade deficits have never been higher

Canada’s economic performance: Unemployment at a 32 year low, Strong GDP Growth,

Interest Rate Hikes

Rising Commodity Prices (Commodities account for 35% of Canadian exports)—especially oil (Canada is a net exporter or Oil)

Other notable exports: Nickel, copper, aluminum, and zinc.

WHAT DOES THIS MEAN FOR INVESTING IN CANADA?

Canadian exporters are the major losers when the dollar appreciates because their products become more expensive relative to their competitors in other countries. However, many economists suggest that this may actually benefit exporters in the long run as they must become more efficient to remain competitive internationally. The other benefit of the high dollar for exporters is that any outstanding foreign debts will now be reduced.

Canadian importers are the major winners. They can now import products at reduced rates due to the stronger dollar.

WHAT DOES THE FUTURE HOLD?

Some analysts are calling for the Canadian dollar to reach parity with the U.S. dollar by the end of 2007 and possible surpass the US dollar thereafter.