The loonie has picked up some steam since the Bank of Canada raised interest rates earlier in the month. This week, the Canadian dollar hit 80 cents for the first time since the summer of 2015, that’s a 10 percent increase since May this year. All that sounds really good, but what does it really mean when the Canadian dollar is doing so well? And other than feeling some inexplicable Canadian pride, what does a strong loonie mean for Canadians? It’s not all good news, unfortunately. There’s some uncertainty going into the next few months with the American economy and the upcoming NAFTA talks. So what does it all mean?
You cross-border shoppers must be happy. With the dollar hovering around 70 cents for most of this year, it’s going to feel like you’re getting a 10 percent discount on everything you buy in the states. A stronger Canadian dollar means you get more bang for your buck when you shop at American stores, pay for vacations and buy online. That’s a pretty sweet deal.
It’s not just us shoppers who will enjoy this (perceived) discount either. Canadian companies that buy equipment from the States will also be suffering less in the exchange. That will lower those companies’ cost which can translate to lower prices for us consumers here in Canada too. No complaints about that.
Sorry, the higher loonie isn’t all cheap Target trips and discount vacations. Something that’s going to suffer in all this is Canadian export. Policy-makers have been trying to increase exports and they’ve been largely successful because a weaker dollar helps give that a boost. With a higher dollar, that growth might take a hit which, in turn, might damage the Canadian economy (not dramatically, but a little).
Another problem is that this dollar increase does not mean that individual Canadians are any better off. Eventually, buying is going to slow down and the dollar will likely go down with it. Household debt in the country is at an all-time high and the expensive housing markets in places like Toronto and Vancouver are cooling off. Less money moving around can make for an economic decline and the dollar would go down in response.
The bottom line
A strong dollar is indicative of a strong economy. Currently, the Canadian economy is doing pretty well in general. To keep this surge in perspective though: the average rate of the Canadian dollar in the past 30 years is 81 cents and we’re a still a little bellow that right now.
We’ll certainly see some personal benefits from the dollar’s upturn but there’s also some uncertainty coming our way. Between Trump’s promise to grow the American economy (even more) and the NAFTA negotiations, there’s a lot that could stop the CAD in its tracks. In particular, if the result of the NAFTA negotiation is unfavourable to Canada, the dollar would depreciate in response.
So for now, enjoy your American shopping and the Canadian pride that comes from the stronger dollar while it lasts.