Experts weigh in on pros and cons of rising loonie
As the loonie hit 80 cents US for the first time in two years earlier this week, many Canadians rejoiced at the money they’ll be saving while shopping and travelling across the border.
But experts warn that a stronger loonie also comes with downsides for our economy, especially when it comes to Canadian exports.
Royce Mendes, director and senior economist at CIBC World Markets, said the pros of a rising loonie include a “10 per cent discount” on U.S. vacations, as well as cross-border and online shopping, since the Canadian currency is up nearly 10 per cent since early May.
Canadian companies that buy goods and services from the U.S. will also benefit, Mendes told CTV’s Your Morning.
But Canadian exports, which were expected to “pick up the slack” as key housing markets cool down, will take a hit, he said on Wednesday.
“A weak Canadian dollar boosts exports. We really wanted that Canadian dollar to stay weak, but a stronger Canadian dollar is a reflection of a better economy, so it’s a little bit of a give and take,” Mendes said
“There are some positives here for the Canadian economy from a stronger dollar, but it’s not all positive.”
The loonie, which was trading at 79.79 cents US Wednesday morning, has been climbing since the Bank of Canada hinted,in June,that interest rates could go higher. On July 12, the central bank raised its key interest rate target to 0.75 per cent from 0.5 per cent, the first increase in nearly seven years.
Karl Schamotta, director of global product and market strategy at Cambridge Global Payments, said that the overall depreciation of the U.S. dollar since U.S. President Donald Trump’s inauguration in January has also helped boost the loonie.
Schamotta told CTV News Channel that, while Canadians will benefit from cheaper trips to Las Vegas and other popular U.S. destinations, analysts are “starting to see a drop in competitiveness for Canada as a whole.”
He also pointed to the negative effects on Canadian exports, which he said traditionally stimulate growth in Canada.
Investors also face a risk when the loonie is strong. Even if a stock price nominally rises in U.S. dollars, shareholders in Canada can find their returns reduced or even eliminated once the market value is converted to Canadian dollars.
In any case, if you’ve been planning a trip across the border or a big purchase from a U.S. retailer, nowmight be a good time to go for it. Mendes said he expects the loonie to weaken “a little bit” in the coming months.