Competitive Devaluation: The Hidden Story Behind the Rise of the Loonie

by admin on July 22, 2010

The Canadian Dollar is going through the roof at the moment.  This is not bad news for people who go on long holidays or buy imports, but for any Canadian who is relying on exporting to sell their goods then this is fairly near a disaster.

At the moment most Canadians who watch the business news are feeling a glow of satisfaction.  When the rest of the world is going to pot, Canada seems to be serenely rising.  Growth figures that have just been announced have been rather good, so much so that the Bank of Canada has been talking about raising interest rates.  House prices as well have been rising while just about every other country has seen house prices correcting, sharply.  And all of this exuberance has seen the Canadian dollar go quietly up.

It’s about to get a whole lot better.  But before we tell you why it’s going to get better for the Loonie, let’s explain why what is good for the Loonie is, after a certain point, bad for Canada.

Very little world trade is down in Canadian Dollars, even trade to and from Canada.  Canada therefore has its prices dictated, both for imports and exports, on what the Canadian dollar is doing.  When the Canadian Dollar is low then imports become expensive as goods remain priced the same in Euros, Yen or US Dollars so the price in Canadian dollars remains the same.  Exports also become cheaper to people who are buying with these currencies.  And when the Canadian Dollar rises in value then the process reverses, exports become cheaper and imports become more expensive.

That is where we are now.

We all know that the economies around the world are being battered and that it all seems to be happening at once.  This means two things.  Firstly it means that most governments want to devalue its currency to grab a bigger slice of the shrinking world trade pie.  It also means that a lot of the assets that used to be sought after by international fund managers are now regarded as almost toxic.  Public sector and private debt that used to be regarded as safe is now regarded as questionable.  Shares are seen as worth a lot less now that profits have dried up and as far as property is concerned; let’s not go there.

So this is having a massive effect on the major currencies of the world.  And their currencies are being battered.  We’re not really noticing as usually when a country’s currency gets battered then its obvious as it goes down in relation to other currencies.  However just as in the valley of the blind the one eyed man is king, so in the valley of the toilet paper currencies the slightly sound currency is going to boom.  And it has.

So this is the background that Canadian exporters face.  Their goods are now more expensive.  They are not better quality and there’s no more of them, they are just more expensive. 

And we all know what happens, eventually, when someone gets more expensive than his rivals without improving quality.  They lose customers.  Welcome to Canada’s future.

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