December 21, 2007

 

Loonie getting loony...

From: The Wall Street Journal

Loonie's Rise Yields Splitting Pain for Canada
By: JOANNA SLATER and DOUGLAS BELKIN

November 12, 2007; Page C1

The Canadian dollar's strength is shifting from a point of pride to a source of economic anxiety after the currency spiked to a level not seen since the 1870s.

At one point last week, the Canadian dollar bought more than $1.10, a modern-day record. Late Friday in New York, one Canadian dollar - known as the loonie for the bird pictured on coins - fetched $1.06.

That means the loonie has strengthened about 24% against the U.S. dollar since the start of the year, far more than the euro or the British pound. Much of its ascent is attributable to a robust Canadian economy. As the U.S. has struggled with an ailing housing sector and credit woes, Canada has surged ahead. High commodity prices have boosted demand for its natural resources, especially oil. The country boasts a trade surplus and unemployment is at a 33-year low.

Now the loonie's rise is sharpening the line between those in Canada who will benefit from a stronger currency and those who will struggle with its impact.

For Canadians traveling overseas or Canadian companies prowling for acquisitions abroad, the pumped-up loonie is a bonanza.

Still, it is causing increasing discomfort for certain parts of the economy, such as exporters, who have to contend with a currency that makes their goods less competitive. It also is sending shock waves through the tourism industry and hitting retailers, as Canadians head south to shop.

Already the impact is reflected in the latest trade figures. Friday, Ottawa said the Canadian trade surplus dropped 38% in September as the strengthening currency and flagging demand from the U.S., Canada's largest trading partner, undercut exports.

When the loonie hit parity with the dollar in September, "we had our little celebration," says Ted Carmichael, chief economist at J.P. Morgan Chase in Toronto. "Now, we're trying to look more realistically about how this is going to affect the economy."

Mr. Carmichael says the strong currency will crimp economic growth by lowering exports and will contribute to higher unemployment as manufacturers shed jobs - as many as 150,000 in the next year, he predicts. At the same time, a slower growing U.S. economy will reduce demand for a host of Canadian exports from lumber to auto parts.

As a result, while Canada averaged 3.5% economic growth in the first half of this year, that figure will likely fall to 2% to 2.5% in the next few quarters, says Stephen Malyon, a currency strategist at Scotia Capital in Toronto.

That is turning the loonie into a hot political issue. Canadian Prime Minister Stephen Harper took the unusual step of commenting directly on the currency's ascent, calling it unprecedented. "With weakness in some of our export markets and the rapid appreciation of the [Canadian] dollar, we are living in challenging times," he told an audience in Toronto last week.

In Windsor, Ontario, just across the border from Detroit, Mayor Eddie Francis can see first-hand the effects of the strong currency. Fewer American tourists are coming to shop or to gamble in his city's casinos. On top of that, the stronger loonie is exacerbating problems in the region's auto-making sector. Lastly, local retailers are suffering because of the proximity of significantly lower prices 20 minutes to the north.

"It's a perfect storm," says Mr. Francis, who can see cars lined up to cross into the U.S. from his office.

The loonie's brawn is a painful twist for U.S. companies such as General Motors Corp. that use Canada as a manufacturing base. One of the reasons they built plants there to export to the U.S. and elsewhere was to take advantage of the formerly anemic Canadian dollar. Those lower costs have now turned into higher ones.

On Nov. 7, GM announced its largest quarterly loss ever. Fritz Henderson, GM's chief financial officer, said the stronger loonie was a "major head wind" for the company.

Canadian manufacturers themselves are bracing for tough times. At Dofasco Inc., a steel company in Hamilton, Ontario, higher energy prices are translating into a big increase in electricity costs. At the same time, revenue is taking a hit because the steel industry is so highly integrated across North America that the company generally is paid in U.S. dollars. "We're just waiting to see how this plays out, but yeah, it's very challenging," says Andrew Sloan, a company spokesman. "We're just trying to stay focused on innovation and productivity." Dofasco is a unit of ArcelorMittal.

For every penny the loonie rises above parity with the U.S. dollar, local manufacturers lose about 1.5 billion Canadian dollars in profit, estimates Jay Myers, president of the Canadian Manufacturers & Exporters, a trade association.

As the critical Christmas shopping season approaches, retailers are nervous, too. The Retail Council of Canada estimates retailers have lost about 5% of their sales as Canadians head to the U.S. to take advantage of their new purchasing power. In response, retailers in Canada from Wal-Mart Stores Inc. to independent bookstores have slashed their prices to match those prevailing south of the border.

Among the biggest losers are Canadian auto dealers. So many Canadians are heading to the U.S. to buy cars that the Canadian Border Services began offering classes on how to navigate the bureaucracy upon their return. Registration for nearly all of the 30 initial classes filled up quickly.

Meanwhile, currency experts say the Canadian dollar has traveled beyond what is justified by economic fundamentals, possibly because of speculative investors who piled in looking for a quick profit.

Not everyone is complaining. "I've put a moratorium on shopping in Canada," says Mr. Malyon of Scotia Capital. Next month he is headed to California for a business trip and is taking "an extra big suitcase."

Write to Joanna Slater at joanna.slater@wsj.com and Douglas Belkin at doug.belkin@wsj.com

Copyright 2007 - The Wall Street Journal

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