The plunge of the dollar will affect many Canadians
February 5, 2015
Oh me, Oh my, The Canadian dollar, Fell from the sky.
Last Wednesday our Canadian dollar dipped below 80 cents U.S. It has fallen 14 per cent over the last six months and 20 per cent within the last two years.
Our dollar is down and our national pride is bruised. Our giant neighbour, the U.S. tends to give us an inferiority complex. Now we have to react to the economic implication of such a vast difference in the value of our respective currencies.
So, the million dollar question is: how does the lowering of the Canadian dollar affect us? For some it hurts and for others it helps.
Consumer spending on all U.S. imported items including groceries, clothing and furniture just got 20 per cent more expensive. If you want fresh fruits and vegetables this winter, you will notice those items imported from the United States will cost more.
If you run a business where a significant number of supplies come from the U.S. or are priced in U.S. dollars, then you have a huge financial problem unless you can pass on those higher costs to your customers.
Generally profit margins are small so that an increase in the cost of materials from the U.S. will suddenly turn a profit into a loss. Some firms will go out of business and staff will lose their jobs. Many Canadians will be hurt by our loonie’s sudden plunge.
Canadians vacationing in the United Sates will find it more expensive. Some will change their holiday plans to a less expensive option or look for something in Canada.
Some Canadians will benefit from the drop in the Canadian dollar. Tourism will be more affordable for Canadians to stay at home and Americans can use their strong dollar to get a significant discount on Canadian vacations.
From an investment perspective, a sudden drop of the Canadian dollar for those whose U.S. investments are held in U.S. currency, will translate into an increase of their investments based on the currency value change.
Think of the world as one big mass of economic activity. There are seven billion people on the planet and four per cent of all economic activity is done in Canada.
Suddenly the other 96 per cent of world’s commerce gets a 20 per cent incentive to do business in Canada versus the United States because of our lower dollar.
That is the key. Canada is now a significantly more affordable place for the world to do business. This is Canada’s extended Boxing Day sale. Everything is 20 per cent off compared to our American friends.
The timing is excellent. There are signs the Canadian economy is slowing. The Bank of Canada recently lowered interest rates in an attempt to accelerate business activity. An additional Bank of Canada rate cut is speculated.
A lower dollar has the same effect as lowering interest rates. It will encourage economic activity. That is good for business. Employees, our workers as well as sales and profits earn tax dollars for different levels of government.
Our opinion is that a lower dollar will have a significant beneficial impact on our growing our economy. Finally we can resuscitate our fragile economy after the fall out from the world recession of 2008 and 2009.
The valuable lesson is that many Canadians will be harmed by the circumstances that will help our economy as a whole. Financial prosperity can be fleeting and should never be taken for granted.