Like a child’s toy that lost its lustre, the Canadian dollar kept getting bounced about the basement last week, a victim of the economic travails in Asia and the fact that no one—even Canadians— seems to care much about its fate. Prime Minister Jean Chrétien caught the prevailing public mood when he said that the falling buck—it dropped to historic lows for five days in a row before inching back up slightly at week’s end to 67.19 cents (U.S.)—“is a reality of life.” For his laissez-faire attitude, Chrétien was lectured by the handful of editorial writers and economists who make a living hanging on such pronouncements. But ordinary Canadians seemed to shrug along with the PM: housing starts and retail sales continued apace. Stock exchanges in Toronto, Montreal and Vancouver surged forward on the back of the hapless loonie. On Toronto’s Yonge Street strip, the tourist shops and electronic outlets did not care that the Canadian dollar was hovering around the 67-cent mark: they were already offering American shoppers an even greater discount—a 40-per-cent exchange rate.
The irony is that the Canadian economy is doing so well it is probably going to lead the Group of Seven industrialized countries, say forecasters at Nesbitt Burns in Toronto. But at the same time, the Canadian dollar gets no respect as a “safe haven” from the buffets of global uncertainty. It has almost become the Rodney Dangerfield of international currency. “I keep asking myself Why is there such a relatively subdued, almost non-existent reaction among people?’ ” says Tom D’Aquino, head of the blue-chip Business Council on National Issues. “Someone said to me the other day, Well, we’ve been through these historic lows before in the mid-80s,’ and I said Yeah, but that was when the dollar hit 76 cents American.’ That’s 10 cents more than it is today.”
Now, faced with an avenging American dollar that is leaving almost every other currency, save perhaps the British pound, in its wake, most Canadians seem ready to vacation at home this summer or, if they are going to the United States, to spend less at the outlet malls. “If we are going to spend a thousand bucks anyway and the dollar goes down a cent, that’s only another $10. Might as well just grit your teeth,” said one Mainebound Montrealer who is too chagrined at the teeth-gritting to want to be mentioned by name. In British Columbia, tourist figures released last week showed that while the number of Asian visitors has fallen off in the winter and spring months, many are still coming at levels approaching that of the mid-1990s—and so are Americans in even greater number than before. ‘Typically, tourists who come from afar, like the Japanese, stay longer and spend more money,” observes Helmut Pastrick, the chief economist with Credit Union Central of British Columbia. “But in actual numbers there may well be more visitors now because of American tourist activity.” The Canadian Rockies are still a huge draw. At the upscale Banff International Hotel in Alberta, the clientele is almost totally Asian. We are still full, at the same [$199 a night] rate as last year,” says sales manager Angela Birkenbach. Other operators may be hurting, she says, “we are not.” Same story at CP Hotel’s Banff Springs: “We’re experiencing a very good year—95-per-cent occupancy” says public relations director Holly Wood. ‘The Japanese business is definitely soft, but we are seeing quite a few Americans in town.”
The biggest beneficiaries of a bargain-basement buck are the resource and manufacturing exporters who buy in Canadian dollars and sell in American with almost gleeful abandon. “As a very general rule of thumb, every one cent that the Canadian dollar drops represents an approximately $ 100-million benefit to the oil industry,” notes David Manning, president of the Canadian Association of Petroleum Producers in Calgary.
With oil prices, like those of most commodities, plummeting since the so-called Asian flu hit global markets in November, the cheaper buck “has helped offset the dramatic decline in the price of oil,”
Manning says. “We are actually benefiting from this.”
So are others. A typical business story last week: Celanese Canada Ltd., the Montreal-based company that makes the plastic for pop bottles, among other things, posted a 30-per-cent jump in second-quarter profits over a year ago, mainly, it said, because of low-cost materials and the sagging dollar.
By contrast, giant Coca-Cola Co. of Atlanta announced a nine-per-cent decline in secondquarter profits because the stronger U.S. dollar reduced the value of its foreign earnings. The weak Canadian dollar also works against professional sports teams that are based in Canada, but pay their players in U.S. currency.
D’Aquino fears the low dollar will create a sense of complacency and false security among Canadian manufacturers so that they will no longer be competitive once the international situation settles down and the value of the loonie increases. A bigger fear by some is that the low dollar effectively hangs a giant fire-sale sign on some of the country’s largest corporate entities. The past year has seen a wave of consolidation in the technology, energy and financial services sectors as Canadian companies have either tried to bulk up to ward off foreign buyers or have been swallowed up in turn. The first six months of this year saw $106 billion in mergers and acquisitions in Canada—more than for all of 1997. Bulking up is what four of the big Canadian banks are trying to do with their megamerger plans. It is also what provoked Trans.
Canada PipeLines Ltd. and Nova Corp. into a $ 14-billion marriage of convenience in February. Since January, U.S. acquisitors have spent $5.4 billion to take over three large independent Canadian energy companies. Last month, giant Merrill-Lynch & Co. bought Midland Walwyn Inc., Canada’s largest full-service independent brokerage house for $1.3 billion. “The economic, financial and business-case fundamentals have to be right to make an acquisition worthwhile,” observes Bank of Montreal chief economist Tim O’Neill. “But on top of that, if you have the benefit of a weaker currency it can push the decision forward.”
So what is behind the fall of the loonie? D’Aquino cites a number of reasons: the flight to so-called quality currencies by money managers skittish about Asia; interest rates lower than those in the United States; an economy heavily weighted in hard-hit commodities; a high tax burden, at least by U.S. standards; and uncertainty about Quebec. Adding to the latter is the prospect of an impending Quebec election, either in the fall or next spring, in the teeth of a dangling dollar.
But what is to be done? Neither D’Aquino nor the Bank of Montreal’s O’Neill are among those urging the Bank of Canada to raise interest rates. D’Aquino says he is a “hard currency man,” but now is not the right time to choke off an economy that is growing steadily, with virtually no inflation, and pouring millions of dollars of additional tax revenue into government coffers. O’Neill argues that one month’s flatness in some economic indicators “does not mean we are on the slippery slope down.” One of the reasons for the drop in the dollar last week was new trade numbers that said Canadian manufacturers’ shipments had slipped one per cent for the second month in a row, an indication that the Canadian and U.S. economies were slowing. But even so, these shipments were still 2.8 per cent above what they were a year ago.
Some analysts are pushing for an interest rate increase to stem the fall. Nesbitt Burns economist Sherry Cooper has suggested that Ottawa could cut taxes to stimulate the economy, if interest rates are used to prop up the dollar. The Bank of Canada last raised the bank rate in January when the dollar slipped to 68 cents (U.S.). It climbed to 71 cents in March before resuming its long, slow slide.
Most financial observers, however, seem to be saying that the fate of the dollar is academic as long as there is no clear end in sight to the situation in Japan or the rest of Asia. The economic slowdown there hits Canada with a double whammy: it reduces the market for Canadian products; it also depresses the world price of the commodities that Canada produces. The good news, though, for those who worry that the dollar dropping four per cent against the U.S. buck will turn Canada into a takeover target: there are bigger bargains elsewhere, particularly in southeast Asia. The Canadian dollar has actually appreciated against many other currencies. It is just the Joneses next door who are proving impossible to keep up with. □
The Low dollar is prompting some of the mega-mergers
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