Has the loonie gone loony?
The Canadian dollar has fallen four per cent since hitting parity in April. Will it continue its downward spiral?
Last June, the Canadian dollar was pretty much where it is now. It was hovering around the 90 cent mark. Today, one Canadian dollar will buy you about 96 cents of U.S. currency. Currencies are volatile and it is extraordinarily difficult to predict the exact level of any particular currency over the short term. Remember, we sailed through parity in April. That wasn't too long ago. Now, we are four per cent lower. Why?
Well, it's not just because of what is happening within our borders. Our domestic economy is very strong and played a big part in the 6.1 per cent annualized growth that we saw in the first quarter of this year.
The main reason for the loonie's loss of altitude is Europe. The euro zone debt crisis has been making headlines and the U.S. dollar has experienced a broad based rally. Despite our neighbour's own economic troubles, investors continue looking to the greenback for safety when the rest of the world starts to look a little less certain. Similar circumstances occurred when the loonie dipped in late 2008 and early 2009. Back then, the loonie slid to the 85 to 93 cent level against the greenback.
Another factor affecting our current slide from parity could be events in China. I will admit that slowing Chinese economic growth has incremental implications on demand for our commodities, but the OECD still expects Chinese GDP growth to exceed 11 per cent this year before slowing to just under 10 per cent in 2011, as the impact of their stimulus package diminishes.
Back to Canada. The loonie is actually doing well against major currencies such as the euro and the British pound as investors reward Canada for its relatively sound fiscal position among G7 countries. The prospect of higher interest rates should keep the Canadian dollar well supported, particularly against those in the G7 where rate hikes probably won't be considered until at least the final quarter of 2010. TD Economics expects the loonie to remain at the 95 to 98 cent mark for the rest of the year before inching back toward parity by June 2011.
Whenever we get to these levels, Canadians start to think about cross border shopping. But it's not necessarily a great idea. Here's an example: At the online Apple store in Canada a 16GB iPad is available for CAD$549. Using the approximate exchange rate of 0.96, this equates to about US$527. The same iPad is available for $499 in the U.S. So you are talking about a savings of US$28 or about 5 per cent. You would need to shop a lot to recover the cost of gas and other incidentals on that shopping trip to the U.S.
On the other hand, travel deals to the U.S. continue to be attractive compared to a few years ago. Europe, however, is where you'll find the best options. The last time the loonie was this strong versus the euro was back in late 2000. In just over a year, the euro has fallen by almost 25 per cent against the loonie. Perhaps you're more interested in seeing Buckingham Palace. The loonie has appreciated by 20 per cent against the British pound.
Either way, since planning for a trip this summer is a short-term goal, do not leave the foreign exchange requirement to the vagaries of the marketplace. Estimate the amount of foreign exchange that you will require for the trip. Many of the expenses can be paid for from here before you leave, such as your hotel stay, car rental, etc. Tourist websites will routinely quote in Canadian funds. On the flipside, with a bit more research you may be able to land better deals once you arrive in your destination. Shop around for exchange rates and lock in your estimated foreign exchange requirement and a bit more as a buffer for any unexpected circumstances. Check online foreign exchange rates at your financial institution as well as at local branches. Also, converting the entire foreign exchange requirement in one go could get you a better rate for the larger conversion.
It's been a long time since we've had so much global muscle in terms of currencies. We might as well take advantage of it while we can. I am!
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