4X Foreign Exchange Topics last updated 2007 Oct 03

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INTRODUCTION

This unit will discuss issues regarding the upward and downward movement of the Canadian dollar, and the consequent effect on companies exporting and importing. It is not intended to be an ongoing thorough treatment of the topic since this topic changes almost weekly, rather it is intended to be a basic resource to support students understandings of the current issues. Basically, there are only three things that can happen   1. the dollar is very high, ie. high 80's to low 90's - which means      o it is difficult for Canadian exporters to sell their commodities, goods and services     o it is cheaper to import products from the U.S., Asia and Europe     o it is less expensive for Canadians to travel overseas for business and tourism 2. the dollar is very low, ie. high 60's - which means     o it is good for Canadian exporters selling their commodities, goods and services              - like cars and car parts into the U.S. market and food commodities to Asia     o it is expensive to import products from the U.S., Asia and Europe     o it is expensive for Canadians to travel overseas for business and tourism              - so we might see more tourism dollars spent at home                  and more information technologies used to cut business travel costs 3. the dollar is neither very high, nor very low, ie. mid - 70's     o some parts of the Canadian economy do OK, others suffer a little bit  It is extremely difficult for a national government to do anything significant about the rise and fall of their country's currency, due to the complex nature of the global currency exchange market - so what we look for is how businesses and government reacts to dollar changes and if those reactions help or hurt the economy. WTGR

Higher Dollar October 2007

image: cbc.ca website October 2007,     data: Pacific Exchange Rate Service

This graphic, from Mark McCracken's website,   http://markmccracken.com/ illustrates how the Canadian dollar has steadily gained in strength against the U.S. dollar from 2002 through to the end of 2004, in 2005 the Cdn dollar gained even more on the U.S. The reason the line is going "down" is because this particular chart shows the U.S. value declining as opposed to the Cdn value increasing.

The CBC produces "backgrounders" on their web site which allow the readers of their stories to have more "in-depth" information about particular topics.

Justin Thompson was the CBC person who interviewed Dr. Bhatia. Parts of Thompson's article, done May 22nd, 2003, are produced below.
 

Low Cdn $ analysis

"The fluctuating dollar" Justin Thompson, CBC News Online,  May 22, 2003 "After dipping to record low values in 2002, the Canadian  dollar has ridden a steep wave to recovery.  Within a 16-month period, the Canadian dollar gained more than 12 cents US - rising from 61.84 cents in  January 2002 to 74.37 cents US in May 2003." Low Canadian dollar  PRO: "A low dollar makes Canadian goods more attractive to foreign buyers and investors. The increased demand  drives up production, boosting Canadian manufacturing and creating jobs. Canada exports more than it imports, and a low dollar ensures the surplus continues. A low dollar also encourages tourism, most of which comes from  the U.S. It also encourages Canadians to spend their  tourist dollars at home." CON: "A low dollar makes import items, including produce  and other consumer items, more expensive. It gives  Canadian tourists less value for their dollar "

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Low Dollar Key Points

Importing produce is a big thing for the Canadian consumer. Being a northern country, we import large quantities of fruits and vegetables 12 months of the year. We produce a small amount of fruits and vegetables in Southern Ontario, the interior of B.C. and parts of Quebec and the Maritimes but these amounts are less than the total national demand. As our Canadian society becomes more demographically diverse we have been increasing the quantities and varieties of the fruits and vegetables we import. WTGR

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High Cdn $ analysis

High Canadian dollar PRO: "Canadian importers have more leverage with a stronger Canadian dollar, because it has more buying power south of the border. U.S. goods - from apples to  auto parts - become more affordable for Canadians."   .Key Points Being able to import a lot of consumer products is a good thing. You don't always want to concentrate on exporting. Importing the consumer products you want, at a reasonable price, serves to enhance the lifestyle and happiness of the citizens of the country. A high Canadian collar also makes it possible for more Canadian tourists to travel outside the country. This is a good thing - you don't want the citizens of a country ignorant of the rest of the world - world travel helps to develop an educated population and a population more likely to understand what is going on around the planet. WTGR . "At the same time, a stronger Canadian dollar will drive down U.S. buying power, resulting in fewer foreign orders.  The resulting downturn in sales will have manufacturers looking to implement cost-cutting measures.

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High Cdn $ analysis

High Canadian dollar CON:  "A high dollar makes Canadian exports more expensive to foreigners. "So clearly the exporters would  be at a loss unless they hedge themselves," says Bhatia. With the drop in foreign orders, Canadian manufacturers  will slow production. This slowdown will lead to layoffs and job losses."   Key Points So, if you want to know if a high Cdn dollar is negatively effecting Canadian exporters competitiveness, look for stories about a Canadian company laying off employees because they lost an export sale due to competition from an American or Australian company that offered the customer a lower price. These stories are most commonly found in products which are based on commodity pricing like semi-processed agricultural products, dimension lumber, and steel. WTGR .

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High Cdn $ analysis Auto Industry

We also have to watch what a high Canadian collar can do to the automotive industry - a large part of the economy in Ontario. A large percentage of the cars made by the Japanese and American manufacturers operating in Ontario, end up being exported to the U.S.  If our Canadian dollar stays high for a long period of time it might cause the Japanese car companies [Toyota, Honda, Suzuki]  to consider moving to Mexico [Nissan did years ago], and cause the American plants to cut back their operations in Oakville and Oshawa. WTGR 2003 (after I wrote the above 2 paragraphs in 2003, a Jan 22nd 2005 article appeared in The Toronto Star titled "Weak US Dollar Lure for Car Firms"  Gerry Malloy wrote "A weak U.S. dollar, particularly compared to the euro, could help bring more automobile assembly work to the United States - perhaps at Canada's expense" Malloy explains that  "Toyota has confirmed its intention to increase its production capacity in North America probably for sport-utility vehicles, which are still built mostly in Japan. According to Yoshimi Inaba,... that expansion will take place in the U.S. not in Canada nor Mexico". permission to quote Gerry Malloy given by Mgmalloy@aol.com in an email to WTGR 2005Apr19. Copy kept on file in permissions binder.

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2003 October $.75               2003 October $.75

? - will the dollar go higher "Clearly the momentum is to push the U.S. dollar weaker and the  Canadian dollar should get stronger over the next weeks and months," said Jack Spitz, director of foreign exchange at National Bank of Canada." 2003 Oct 6   Key Points This current situation is an interesting comment on how things go in international business. It is difficult to plan something for certain because there are so many influencing variables over which one has no control. In this particular case, the high rise in the Canadian dollar does not have so much to do with the Canadian economy, but rather the reduced value of the U.S. dollar WTGR .  World opinion on the U.S. dollar "the president of the European Central Bank said the United States' worsening trade deficit and soaring budget deficits means a weaker dollar is unavoidable. " reported by the National Post 2003 Oct 7 "...the market doubted the strength of the U.S. economy and fretted over the size of the U.S. current account  deficit, analysts said."   in a Reuters story released 2003 Oct 7

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2003 October $.75

The National Post reported Oct 7, 2003 "Some analysts are predicting an 80-cent loonie over the next year or so, [which in 2005 proved true] which could squeeze Canadian exporters who have relied for years on a low currency value to compete in U.S. and overseas markets. However, that would help importers because things imported from the United States would be cheaper when converted into Canadian currency." .  Key Points The answer to the question about whether, overall, the high dollar will help or hinder Canadian international business depends on whether one believes our economy depends more on exporting to earn money, or importing cheap stuff to {re-sell and} make money. WTGR .

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Key Points

There are many examples of how a high Canadian dollar effects Canadian exporters - I chose to show you Alcan since Alcan represents commodities and semi-processed [ingots, I-beams] and processed products [alumnimum foil]  from the mining sector. WTGR

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2003 July An example  of how a high dollar effects a Canadian exporter 2003 July

q Click on this scan of a Toronto Star article which discusses how a higher value for the Canadian dollar negatively effected Alcan's annual sales - since a significant amount of its business is exports to the U.S. and Europe .

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2003 August An example  of how a high dollar effects a Canadian company facing bankruptcy 2003 August

.Key Points There are many examples of how a high Canadian dollar effects Canadian exporters - in some cases the effect can influence whether a company does, or does not become bankrupt. WTGR .  Click on this scan of a Toronto Star article which discusses how a higher value for the Canadian dollar influenced the chances of a company recovering from bankruptcy.

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Key Points

The National Post {which is increasingly referred to as the "official opposition" due to the tattered way the Conservatives and the Alliance are handling themselves against the governing Liberals} had a story about the low dollar. When you you read such a story like this in such a prominent newspaper it is challenging to ascertain how much is "news reporting" and how much is "news making" - as this story is sure to be utilized by various federal politicians in the future. This is also a good example of how reading the newspaper on a regular basis can allow you to learn a lot of useful information about International Business Management topics. WTGR

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$.65 cent Dollar   2002 Oct                 $.65   2002 Oct

Wednesday, October 09, 2002 Jacqueline Thorpe, National Post .  "The Canadian dollar is unlikely to appreciate  much past US65¢ over the long term -- at least through to 2010 --  because investment  flows rather than trade or commodity prices are now the key drivers of exchange rate fluctuations, the Conference Board of Canada said yesterday [2002 Oct 08]."   Key Points Even if you think you have good information on which to make such pronouncements, it is foolish to be "too certain" because 6 months after this statement was made about the 65 cent dollar, the dollar went to the mid-70's in June and July of 2003 and by October 2003 it had gone past 75 cents. WTGR .  ""The traditional explanations [for currency moves] have been along the lines of commodity prices and trade but with the globalization of financial markets, which have exploded in the last 10 to 15 years, it's financial  flows which drive the currency," James Frank, chief economist of the Ottawa-based research group, told a conference in Toronto on the North  American economic outlook." "The U.S. dollar has been the primary beneficiary of financial flows this past decade and that shows little sign of changing, despite the negative outlook for the U.S. economy. Investors are no longer ploughing money into U.S. stock markets or high-tech companies but into the safety of  U.S. bond markets instead.  Mr. Frank said Canadian investors have likewise been sending their money to the United States. He said the only area where significant money is flowing into Canada is the oil and gas industry."\\ check  www.conferenceboard.ca

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