Greenback and Loonie Joined at the Hip since last September
Alex Carrick
Loonie Up 50% vs Greenback; Greenback Down 33% vs Loonie
From January 2003 to September 2008, the Canadian dollar increased in value by slightly more than 50% versus the U.S. dollar. The inverse was that the U.S. dollar dropped in value by about one-third versus the Canadian dollar.
During those nearly five years, profits reported by subsidiaries of American companies located in Canada had a built-in upward advantage due to the currency value change. Since September of last year, however, the two currencies have been joined at the hip. The have moved in tandem, and mainly downward, versus other major currencies around the world.
The loonie rose to parity with the greenback on the wings of high oil prices. However, last fall was also the time when concerns about a U.S. slowdown began to appear. The Canadian economy is still highly tied to what happens in the United States and the economic prospects for both countries were downgraded by international currency traders.
Interest Rate Differentials
Another significant factor has been the actions taken by central bankers in both countries. Interest rates have been lowered aggressively in the U.S., and Canada has followed along behind, although a good deal more timidly. By comparison, interest rates in Europe have been left alone at relatively high levels, to contend with what is viewed as a serious inflation threat. (continued below)
The accompanying charts show that since last fall, except for during the latest month, both the U.S. and Canadian dollars have been weakening versus the Euro, the Swiss franc, the Japanese yen, the Chinese yuan, the Brazilian real and the Australian dollar. (The upward slopes in most of the charts mean that it takes more greenbacks and loonies to buy the other foreign currency, and hence the term “weakening”.) A number of these currency movements are quite interesting.
Some Interesting Currency Movements
The Swiss franc and gold are seen as safe havens during times of economic uncertainty. The recent past certainly qualifies, given the problems in U.S. financial markets. The strength in the Euro is making it easier for both Canadian and U.S. firms to sell into markets on the continent. On the other hand, the greenback and loonie have been essentially flat versus the British pound.
American legislators have gotten some of what they wanted from the Chinese government with respect to the yuan. It has appreciated nearly 20% versus the U.S. dollar since it was allowed to partially float in July 2005. This has made Chinese goods somewhat more expensive when imported into the U.S. Because the Canadian dollar has appreciated at an even faster rate versus the U.S. dollar, Chinese goods are still a little cheaper in Canada now than they were three years ago.
Europe now more Important to China
There is another implication that goes along with the relative changes in value. At the same time as the yuan has increased about 20% versus the U.S. dollar, it has fallen about 10% relative to the Euro. This means that Chinese goods have grown cheaper in Europe, even as they have gone up in price in the U.S. As a result, the profile of Europe as a major customer for Chinese goods is on the rise relative to the United States.
Over the past six months, the numbers of greenbacks and loonies to buy one hundred Japanese yen have been on the increase. This appreciation in the value of the yen makes it harder for Japanese exporters to sell into North America. It also lowers the after-conversion revenues that Japanese firms located in North America, such as automakers, are reporting back to their head offices.
Due to exceptional demand for raw material resources from China and other regions of the Far East, the Australian dollar has been on a roll. It has been moving up in value versus both the U.S. and Canadian dollars. Interestingly, the resources that Australia is selling are priced in U.S. dollars, which means that the currency-adjusted returns to Australian firms are not as high as they might otherwise be.
