The Canadian dollar continues its surprising ascent
A show of strength
The Canadian dollar continues its surprising ascent
When Laurie Weston began importing shoes to Canada from the Far East 15 years ago, he says, the last thing he expected to become was an expert in foreign currency trading. But now, the 52year-old president of vwv Enterprises Inc. of Woodbridge,
Ont., located 50 km north of Toronto, says that he must keep a close eye on the value of the Canadian dollar in order to remain competitive in a recession-battered domestic retail market. During the 1980s, Weston had to cope with a dollar that was low in value relative to the U.S. dollar and other key foreign currencies. That diminished his firm’s purchasing power overseas and cut into its profits. But over the past year, the dollar has climbed by nearly 3.5 cents (U.S.) to 88.72 cents (U.S.), its highest level in 13 years. Weston says that the strong dollar has given him a crucial edge over
domestic shoe manufacturers in a soft retail market. He adds: “There are too many sellers chasing too few buyers to sit on any profit from a strong Canadian dollar.”
For the moment, the currency edge enjoyed by Weston and other Canadian importers over North American manufacturers appears to be secure. For their part, Canadian manufacturers and resource companies have been demanding that Ottawa take action to lower the dollar in order to help boost their foreign sales, despite figures released last week showing that Canadian exports to the United States reached a record level of $9.7 billion in August. However, the complaints of the exporters, who employ some three million Canadians, have met with little response. Indeed, Finance Minister Donald Mazankowski told a business group in Tokyo last week that Ottawa will not interfere in international currency markets—even if the dollar climbs higher. Mazankowski clearly recognizes that the dollar is being supported by powerful international market forces, the most important of which is the attractiveness of Canada’s still relatively high domestic interest rates. Moreover, some currency traders predict that the Canadian dollar will climb even higher. Says Graham Sweet, vice-president of foreign exchange at the Canadian Imperial Bank of Commerce in Toronto: “We’re looking for more strength in the dollar ahead. It should get to around 90 cents [U.S.] and then pause while the disbelievers panic.”
At first glance, the dollar’s recent strength appears puzzling. It has continued to climb even as Canadian interest rates have dropped to their lowest levels in four years. That appears to fly in the face of the traditional theory
As a result, international investors seeking a solid return and a presence in North America are still investing in Canada. Says Susan Clark, chief economist at the brokerage firm Richardson Greenshields of Canada Ltd. in Toronto: “We may be in a knot about things like our
that falling interest rates drive investors to spend their money where the rates are higher. But despite a drop in the key prime rate, which banks charge to their best customers, to nine per cent from 14.75 per cent over the past year, Canadian interest rates remain almost three percentage points higher than comparable U.S. rates. constitutional crisis, but that doesn’t faze global investors. They see Canada as a low-risk market with a strong, stable currency.”
In the first half of the year, foreign investors snapped up $17 billion worth of government and corporate bond issues, taking advantage of Canadian interest rates. Sweet said that investors currently receive a return of about nine
By lowering the cost of imports, the continued resilience of the dollar is also assisting Bank of Canada governor John Crow in his battle against domestic inflation. According to Donald MacArthur, president of the Toronto-based Canadian Importers’ Association, about 30 per cent of the goods that Canadian consumers buy are imported. Those cheaper imports have helped curtail increases in the cost of living by offsetting the impact of domestic tax and price increases.
per cent on a provincial government bond, and slightly higher for a corporate bond.
But that benefit is of little help to Canadian manufacturers and naturalresource companies who say that the strong dollar has battered their bottom lines. Montreal-based Canadian Pacific Ltd., for one, is heavily dependent on foreign sales of oil and forest products. Last year, the company earned a profit of $355 million on sales
of $10.5 billion. But company executives say that each one-cent (U.S.) rise
in the value of the Canadian dollar reduces its profit by $21.6 million. In fact, the company cites the strong
Canadian dollar as one of the principal factors contributing to the $165.2-
Some economists, however, say that the increased pressure from the high dollar on Canadian Pacific and other exporters has been a healthy development that has forced them to become more internationally competitive.
million loss recently reported by its subsidiary, CP Forest Products Ltd., on sales of $1.47 billion in the first nine months of 1991.
“The easy route for Ottawa would be to give in and devalue the currency to stop the screaming,” says Clark. “But that would just allow industry to get fat and lazy again, like it was with a 70-cent [U.S.] Canadian dollar.” She adds that after years of “living in a state of corporate denial,” Canadian companies are now being forced to take the tough measures required to cut costs and enhance productivity. But for the many companies that are still reeling from the recession, that prescription for long-term health has an especially bitter taste.
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