Remember the Dollar?

8 October 2008

It wasn’t long ago that the strength of the Canadian dollar compared to the USD was a source of major concern for Canadian manufacturers.  With the recent turmoil in the markets, the Canadian dollar is weakening again as traders speculate that the recession will reduce demand for the commodities, oil in particular, that are the backbone of the Canadian economy.

USD/CAD currency exchange prices over the last few years.

USD/CAD currency exchange prices over the last few years.

I’m sure many in the manufacturing sector are torn between the impacts of the recession and the benefits they will get from the weakening dollar.  To survive the plunge in the US dollar from the heights of 2002 when it was trading at over $1.50 CAD to the lows in November 2007 when it hit nearly $0.90 CAD, manufacturers that sold into the US economy had to become very efficient.  It was essential to manage Canadian dollar costs to ensure profitability.  If goods were sold in US dollars, there was a double impact of falling revenue in Canadian dollars.    Many were forced to raise the prices of the goods they sold into the US.  A strengthening of the US dollar will reverse these impacts and the now efficient firms will benefit.

For most of 2008, the dollar has been trading near par but it has risen nearly 10% to $1.10 in the last three months.  [Update: As of the 10th October, the USD/CAD rate had increased to over $1.18]  That has to be a relief to manufacturers that sell into the US.  It represents free revenue in foreign exchange as well as the opportunity now to reduce US prices in the face of a recession.

The question is whether the recession will have more of an impact than the dollar.  My own guess is that the coming year will be a bad one and that the Canadian economy will again start to look good compared to the US which will reverse the trend in the dollar.  So enjoy the bump while it lasts but don’t depend on it.  More belt tightening will be required in the future.