Strong economic growth, particularly in the mineral sector, and an anticipated rise in interest rates may result in the loonie matching the American greenback by the end of this year, according to Lakehead University economist Livio Di Matteo.
The last time the Canadian dollar made such a debut was in the late 1960s and early 1970s when it not only matched the American currency, but surpassed it. Di Matteo forecasts this may well happen again, since the Canadian economy is so strong and the United States is softening.
To put it into perspective, the manufacturing sector usually benefits from a strong domestic currency, since they purchase products from United States. The closer the Canadian dollar is to the American dollar, the more purchasing power they have.
However, when it comes time to sell their product internationally, the Canadian dollar then hurts their position because the higher the dollar, the less attractive it is in the global market, he says.
Asia’s strong demand for Canadian resources makes up a significant portion of Canada’s exports, but forestry companies exporting to the United States will hurt if the dollar keeps climbing.
Every 1-cent increase in the Canadian dollar against the United States means a $30 million hit on Abitibi Consolidated’s operating revenue.
“Last year, we lost $221 million (Cdn) due to the currency situation,” Denis Leclerc, investor spokesman for Abitibi, says.
If the loonie matches or exceeds the American dollar, it will be a “phenomenal issue.”
Most North American companies have not been running on healthy profit margins for almost seven years and therefore cannot take advantage of the strong dollar to invest in infrastructure needs.
“In order to spend money, you have to make money,” Leclerc says.
The rule of thumb for Tembec is every 1-cent increase, means a $20 million off their bottom line. The demand for lumber in the United States housing market is down an estimated 25 per cent, limiting the market share for North American companies.
“Canada is going to receive a disproportionate share of the capital reduction to balance the supply and demand in the forest products commodities,” Jim Lopez, president of Tembec Inc. says.
On the mining front, Cameco Corp., the world’s largest uranium miner, has the bulk of its operations in Canada and is sensitive to currency fluctuations because the metals used to fuel nuclear reactors are priced in U.S. dollars, according to a June 5 article in the Globe and Mail’s Report on Business. Every 1-cent decrease in the U.S. to Canadian dollar exchange rate results in a corresponding decrease in annual net earnings of about $4 million.
However there are ways around the rising Canadian dollar.
Mansour Group of Companies is a major supplier of ground support products to numerous mining companies across Canada and overseas. To compensate for the currency fluctuations when importing American goods president Milad Mansour “hedges the dollar.”
Now, hedging is not for the faint at heart, he says.
“It’s kind of like gambling.”
If one anticipates the dollar will rise or drop to a certain value, and it does, he or she is guaranteed that value upon purchase.
“But one cannot wait,” he says, “otherwise the opportunity is lost.”
