As the Canadian dollar continues to weaken against the U.S. dollar, Canadian consumers and investors are feeling the economic strain of higher prices for imported goods and reduced purchasing power compared to their U.S. counterparts.
Worse, some currency watchers don’t expect the loonie to appreciate any time soon.
While a weaker loonie can benefit certain sectors, such as exports and tourism, it causes significant financial pressures, from higher domestic prices to increased import and financing costs and other economic pressures that offset – or outweigh -- any perceived benefits.
The Canadian dollar is currently over 10% undervalued based on purchasing power parity (PPP). Furthermore, due to divergent monetary policies followed by the BoC and the U.S. Fed, the rate differential could widen further if the Canadian central bank enacted further rate cuts and its U.S counterpart kept rates higher for longer.
At the time of writing, the loonie was worth about $0.73 U.S. dollars, as of June 29. With the chasm between to two likely to continue to widen, here are some ways a depreciated Canadian dollar affects consumers and investors in Canada.
Rising Costs for Canadian Consumers
The weaker Canadian dollar leads to higher prices for imported goods and services, affecting the cost of living for Canadians.
The most visible impact is on the goods imported from south of the border. When you make an online purchase from a U.S. retailer, a US$100 item could cost you about $137, and more if the loonie slips further.
In some cases, Canadian consumers will pay higher prices even when shopping locally. When Canadian retailers purchase goods from the U.S., the higher costs due to the exchange rate are often passed on to consumers.
Moreover, a weaker loonie drives up domestic prices, directly impacting consumers' wallets. For example, certain commodities like gasoline are priced in U.S. dollars. A weaker loonie means higher prices at the pump.
Food is another good example. Several food items consumed by Canadians come from across the border. Fresh fruits, nuts and vegetables that are shipped from the U.S. are more sensitive to currency shifts than others. Therefore, when the Canadian dollar drops, it pushes the price of these imports higher.
How the Canadian Dollar Impacts Investments
A softness in the loonie can significantly impact investments, especially those in U.S dollar-denominated securities. For individual Canadians, investments in the U.S. or in U.S.-based securities will result in higher returns when converted back to Canadian dollars. More bang for your buck, if you will. Conversely, purchasing any U.S. dollar-denominated stocks becomes more expensive, as a depreciated Canadian dollar requires more funds to acquire these investments.
Another way investors can play the loonie's weakness is by investing in companies whose profits are boosted by a weaker Canadian dollar. Canadian companies in the right industry, with strong fundamentals, and a healthy revenue and share-price exposure to the U.S. dollar stand to gain from the tailwind created by a declining Canadian dollar.
However, this is a double-edged sword for the Canadian economy, as it incentivizes investment outside of Canada, diminishing the value of domestic assets.
The Price of the Dollar and Canadian Businesses: Some Win, Some Lose
The erosion of the Canadian dollar against the greenback is net-positive for Canadian companies that have strong U.S. operations. The companies generate a sizable portion of their revenue and profits in U.S. dollars while reporting results in Canadian dollars.
A weaker loonie means an additional bump to their revenue and bottom line. Further, these companies export goods and services in U.S. dollars, but have costs in Canada and thus stand to benefit when the CAD goes south.
While Canada is increasingly looking to diversify its trading partners, the economy is still closely tied to the U.S. market. This means any fluctuation in the exchange rate will have an immediate impact on Canadian businesses, depending on which side of the business relationship they’re on.
On the other hand, a lower loonie leads to more expensive imports. When the Canadian dollar weakens against the U.S. dollar, it becomes costlier for Canadian businesses to import goods from the U.S. This is particularly true for items like machinery, specialty equipment, vehicles, agricultural products and mineral fuels, which are often priced in U.S. dollars. An increased cost of doing business, therefore, could hamper production and hurt employment opportunities in Canada.
What a Weak Loonie Means for Canadian Consumers
Canadian shoppers and travellers are hit the hardest when the Canadian dollar weakens, as it dents their purchasing power in the U.S. However, it benefits Canadian sectors like tourism and real estate, which experience an economic boost from international buyers.
On the flip side, when the loonie soars it goes that much farther in the U.S, offering more bang for the buck for Canadians making cross-border shopping trips or taking a stateside vacation.
Those who frequently travel across the border, for business or pleasure, may want to consider acquiring a U.S. dollar-denominated credit and/or debit card that is tied to a U.S. dollar bank account. Many Canadian banks have operations south of the border and offer cross-border banking services. Not only does a U.S. dollar-denominated card protect from the loonie's weakness, but it also saves a small fortune in conversion fees.
Given that the strength of the loonie impacts different industries in various ways, Canadians should strategically leverage its fluctuations.
Moreover, it's crucial to recognize that a weaker dollar reflects broader economic concerns, including tepid business investment and sluggish growth. As such, understanding these dynamics is essential for effectively navigating the financial landscape when the loonie slides.
