The march towards parity with the U.S. dollar is on again. Recently released Canadian economic data clearly shows our country’s economy is on the mend, pushing up the value of our currency and attracting foreign investors. Many investors are asking, is the recent climb in our dollar sustainable this time?

Many economists believe the most recent dollar surge is sustainable for the foreseeable future. Some have even called for the loonie to remain at par or higher for the next three years. Others have taken a more pessimistic view, stating that our dollar is poised for a roughly five-six per cent correction from its current level. So opinions are divided.

 

What is clear, based on historic values, is that the Canadian dollar is well above its mean or average value of the last 50 years. On average, the loonie has been worth between 82 and 85 U.S. cents. Therefore, based on this fact and a premise that all things revert back to their mean, I believe our dollar at some point should fall versus the U.S. currency.

Our government believes that the strength in our currency is justified based on how well Canada has come through the recession. Our real estate market was hardly touched, our banking system barely missed a beat and we are starting to see not only GDP growth, but growth in our labour market as well. The recent CPI numbers revealed that inflation has now crept up to the higher end of the Bank of Canada’s range, leading many to believe believe a rise in interest rates in June is almost a sure thing. This in turn may cause our currency to rise even further against the U.S. dollar because the Federal Reserve is not expected to increase interest rates for a period of time yet.

There are many that believe that individual businesses and manufacturers will be able to handle the strong dollar this time around because they have had ample time to prepare for this gradual rise in the currency, and businesses found themselves in a similar situation in 2008. Our government believes that a strong dollar will allow companies to to purchase better equipment and technology used outside of Canada to create more productive and efficient ways of doing business, which they feel will lead to Canada being more competitive with other countries.

Although our currency’s strength can lead to some positive events, it is my opinion that there are still more negatives than positives to a higher currency at this time. The number one negative is that our exports become a lot more expensive to the U.S., our number one trading partner. If the U.S. starts to buy fewer goods and services from us, this will negatively affect our country’s growth over time.

 

Other areas such as tourism and the film industries also get hit quite hard by a strong dollar, as does the lumber industry. In my opinion, there are more sectors that will be negatively impacted by a stronger dollar than will benefit. Thus, I believe it is in the country’s best interest to have our dollar trade closer to historical levels than parity.

There is no doubt that commodities have driven our dollar to its current high levels. If those that predict a slowing of the Chinese economy is around the corner, than that in turn should limit the price increase of commodities in general, since China has been a main driver of this sector of the market. However, if the price of oil and commodities continues to move higher, we may see our dollar rise above parity in the near term. I believe in the long run, this cannot be sustained for the health of the Canadian economy.

 

If you have any questions regarding the above article or are looking for an Investment Advisor to help you with your portfolio, please send me an email at asmall@dundeesecurities.com. I will be glad to speak with you.

Allan Small is an Investment Advisor with Dundee Securities Corporation, a DundeeWealth Inc. Company. This is not an official publication of Dundee Securities and the author is not a Dundee Securities analyst. The views expressed are those of the author alone, and are not necessarily those of Dundee Securities or Metro Canada.