Wednesday, February 5, 2014

Low Loonie Vital For Economic Rebalance

The CAD (Canadian dollar) has started a downward slide at a pace faster than it was initially anticipated. In the beginning, the CAD’s retreat was treated as a positive sign with hopes about generating economic recovery, yet it’s becoming more and more frustrating as the dollar keeps sliding downward; it’s already around 11 cents below parity with the USD (Greenback).

However, the Canadian manufacturing sector and the Canadian Government appear to be welcoming the dollar’s weakness. There is a sigh of relief in the concerned quarters, because the critical issue of trade deficit seems to be resolved partially if not fully eliminated.
The exporters foresee the boosted profits they hope to derive from the lower exchange rate. Simply because with the previously rising CAD, the exports had reduced significantly causing a trade deficit which happened to be responsible for having disturbed the balance of payments; this scenario damaged the Canadian economics to a great extent.

Since the stronger CAD always tends to hurt the Canadian manufacturers by making it more expensive to sell any type of goods in the U.S., a weaker CAD is better. And, if the CAD is low, Canadian companies that export goods to the U.S. get a boost because they’re able to generate revenue in higher-valued USD (US dollar); the Canadian manufacturers are able to market their product south of the border with more competitiveness. Thus, the manufacturers and exporters are the big winners when the CAD drops.
Other beneficiaries of the low loonie include foreign tourists/vacationers with higher valued currencies are excitedly attracted to Canadian places of attractions. The same goes for the foreign investment in Canadian real estate. Home prices may be up this year, but the low dollar still makes property at bargain prices for people who make their money in other currencies. That’s why the Canadian economists have solid reasons to see success in a lower-valued loonie.

According to a report released by the Bank of Montreal on January 16th, a 10 percent drop in the Canadian dollar may boost Canada’s GDP by as much as 1.5 percent over two years. Surely, the extra growth mostly comes from additional profitable exports, along with increased tourism and foreign investment in Canadian real estate.

On the contrary, as the CAD is now below $0.90 (USD), the concerned ones are raising their eyebrows over the devaluation perceiving something fishy there. And, there is some type of a reverse scenario as the cross border shopping is thought to be out of question. Because, the current lower exchange rate adversely affects the Canadian shoppers. Air travel for the Canadians to domestic or overseas destinations is becoming extremely difficult. The weaker purchasing power is to be blamed as this culprit has overpowered the potential vacationers.

"The downward trend in the Canadian dollar is too strong to fight or attempt to pick a bottom," Scotia bank chief currency strategist Camilla Sutton wrote in a note last Friday.
The most painful is the integrated North American market for gasoline; it’s already costing the Canadians financially to cover the difference in exchange rate. Buying Gasoline with Canadian currency cost the consumers more as CAD is less in value now. The loonie drops in value, so does the price of various imported items in Canada.
As, the Canadian retailers depend on imports from the United States, the dollar related weak purchasing power compels them to boost the prices; this produces a financial strain which in turn becomes a major disturbing factor.

Moreover, a falling dollar has negative impact on investments in the US by the Canadian investors, because buying US stocks and mutual funds with CAD is way too expensive. In fact, investors will lose if they buy U.S. investments with Canadian dollars.
For those who hold accounts of American stocks or mutual fund units, the value of those accounts will typically rise if the Canadian dollar falls. That shows that any returns you make will get some boost. This is encouraging that the falling dollar would lead to surge in exports; which would compensate for the increase in prices for the imports.

Forecast for 2014: The sales pace in 2013 was “neither too hot, nor too cold,” said TD Bank economist Diana Petramala. She is forecasting sales to stabilize this year and prices to grow by a “moderate” 2 per cent. Many economists believe that demand for housing would remain steady this year. The economic growth is expected to pick up. And, the interest rates are likely to stay around historically low levels.
Furthermore, the rate of inflation in Canada is based on the consumer price index (CPI). An assessment is made of how much the CPI has risen in percentage terms over a given period of time compared to the CPI in a preceding period. A negative inflation (deflation) is said to have taken place if prices fall. The deflation actually is more dangerous than inflation.

Let’s remember: The BOC’s most important objective is to maintain the value of Canadian currency by keeping inflation low and stable within the range of 1 percent and 3 percent. The bank is interested in a stable and secured currency.
If the BOC (as central bank) sets a new target for the level of the key interest rate,  this would lead to a change in the interest rates for loans, mortgages and savings; which have an effect on the exchange rate of the Canadian dollar.

Despite all market manipulations, the BOC tries hard to maintain its monetary policy to facilitate the dollar to continue onto its own course. The ongoing presence of inflationary or deflationary pressure is to be taken into consideration for setting the direction of interest rates.

Benefit of the soaring loonie can’t be denied as it trims heavy national debt and the imports become cheaper for the consumers, yet a weaker loonie is so vital to cure the faltering economy by encouraging economic boost up. 

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