Wednesday, November 07, 2007

Loonie Beats Dollar Benefits Who

And, as predicted, the dollar reaches 1.10

Loonie surpasses US$1.08 in overseas trading

So what.I still see American price differentials of at least nine to ten bucks on CD's for sale at Starbucks, books at Indigo/Chapters. Heck even an American price differential on the duvet we wanted buy. Our dollar is high so who is raking in the profit? Well the retailers are and so are their suppliers.

Of course currency traders can make trillions off the cost of the loonie vs. the dollar, but for you and I well we are still paying last summers prices for American goods. Of course because the Canadian retailers bought their stock at higher prices last summer too.
But often our retailers are simply branch plant operations of their American parent company. Which is why Wal-Mart can adjust its prices, so should Home Hardware. While Rona or Indigo can't do so as easily.

Wait a minute whatever happened to just in time production costs. You know the Toyotaization of the economy, where goods are produced and shipped as needed. Should the rising loonie be reflected almost immediately, give or take a month, in the actual production of items. Well of course, but to reprint all those book and cd covers costs money. So the price stays the same on the source label. It's up to the retailer to drop the cost.

Many of the town’s largest retailers say consumers can expect price cuts due to the rising Canadian dollar.

Local management at the big three - Canadian Tire, Wal-Mart and Zellers - wouldn’t comment personally, but passed the question on to press releases or spokespeople at their head offices.
Canadian Tire spokesperson Lisa Gibson said the chain has already dropped prices on over 1,000 items and more will come. The company is committed to being competitive, but Gibson said the exchange rate is only one factor in retail pricing.

"It’s a little more complicated than it seems," she said. "The products you see on the shelves we purchased months and months ago. If the dollar stays high there will be more savings."
A press release from Hudson’s Bay Company, parent company of Zellers, said price cuts started to take effect on Oct. 19. Zellers stores will feature a price cut promotional progam to signal to consumers the products where savings are being obtained.

"HBC is fighting for Canadians," said Rob Johnston, president. "We have worked with our vendors to obtain better deals on merchandise at Zellers. We understand that the rising Canadian dollar has led to a demand for lower pricing and this is our attempt to provide real savings for Canadian families."

According to a press release from Wal-Mart Canada, the company has been negotiating with suppliers for a year to turn the higher loonie into lower prices for its customers. As a result, thousands of items have seen price rollbacks each week. Wal-Mart is committed to 7,000 rollbacks weekly for the holiday shopping period.
Maybe before the Christmas sales rush the loonies rise will be reflected in a mark down of the American prices we pay. Well of course after all it's the Christmas rush. All retailers deal in volume, so we should expect to see prices drop.

MacKinnon said it may be a temporary blip, but even if, in the long run, the Canadian dollar stays exactly the same as the U.S. dollar, you can't expect prices to be exactly the same. Transportation costs, competition and a variety of other factors contribute to the price of goods: the exchange rate is only one part of the picture.

His advice for getting the best deals?

Do your shopping online.

Even though books and magazines that have been slashed to U.S. prices at places such as Wal-Mart, consumers can save even more money by shopping online and paying U.S. prices in Canadian dollars.

"That's what I'm going to be doing this year," MacKinnon said of the upcoming holiday shopping season.

And don't expect to get ten cents on the dollar if you trade in that old folded money from your last trip south of the border.

And beware of all the whining in the resource and manufacturing sector that accompanies the daily news of the loonies flight. Its a mirage. The real impact is declining prices for some resources.

The merger of Abitibi-Consolidated Inc. and Bowater Inc. is complete, but today both companies are expected to report their third-quarter financial results separately in the midst of an industry-wide newsprint slump.

And the final profit report for Abitibi is not likely to be good as its results are expected to be adversely affected by the strong Canadian dollar, rising costs and depressed newsprint prices. Analysts forecast Abitibi's loss at 29 cents a share during the third quarter.

The high loonie is only exacerbating problems in an industry beleaguered by stagnant natural gas prices and by changes imposed by the royalty review, industry watchers said yesterday.

The government's concern surrounds the fact that natural gas prices have remained stagnant and, thanks to the high dollar, Albertans are getting less cash today than they were for the same amount of the resource six months ago.

And even companies with American investments have made record profits despite the price differential between the loonie and the greenback.

Manulife Financial Corp. now earns so much of its $1.07-billion in quarterly profit from outside Canada that one analyst even asked yesterday why the company still reports its numbers using the soaring loonie.

"How do you justify using the Canadian dollar?" asked Desjardins Securities analyst Michael Goldberg of the company's executives on a conference call .

The Canadian dollar's rise cost Manulife's bottom line more than $56-million in the third quarter of 2007, while more than three-quarters of the company's premiums and deposits are from the United States or Asia, and almost 60% of quarterly profit comes from international operations.

In fact, Manulife has considered reporting in the U.S. dollar, said chief executive Dominic D'Alessandro.

But with more than half of all shareholders resident in Canada, it is unclear whether investors want U.S. dollar numbers, he said.

He might have added that the negative impact of the loonie's rise is hardly a dent in the longer-term growth of his powerhouse global insurer, one which had profit increase 10% over last year despite unexpectedly sharp currency movements.

And there is a silver lining to the rising loonie when it comes to some folks salaries.

Surging loonie giving Montreal Canadiens financial leeway,
And remember the Brain Drain not much in the news about that lately, but just wait the loonies rise will contribute to that too.

Your dollar will now go further than it has in quite some time. The US$40,000-a-year tuition bill is going to be, well, C$40,000. Duh, I know, but think about just five years ago, when that US$40,000 tuition bill was $60,000.

And it has not impacted Canada's hotel industry because that industry is relying more on internal travel than tourist accommodation.

According to Statistics Canada’s fourth-quarter survey of travel accommodation providers carried out in the second half of September, a majority of the survey’s 1,300 respondents expect to be busier in the fourth quarter of this year than they were in the third quarter and much busier than they were a year ago.

Because the travel accommodation industry is quite sensitive to exchange rates, the fact that its prospects strengthened in the fourth quarter sends two messages. First, it reinforces the view that domestic demand in Canada is strong heading into 2008.

Second, given the fact that accommodation providers expected demand to strengthen even before Mr. Flaherty’s recent mini-budget, the effects of lower taxes should give another boost to domestic travel and accommodation demand well into 2008.

And the rising loonie is helping Newfoundland pay off its debts. The same goes for the Federal government, and all other levels of government, provincial and municipal that borrow money in U.S. funds. Time to pay down those debts while the loonie is high, and damn the penalties.

The loonie's surge to historic highs means the provincial government will save more than $10 million in debt payments this year.

As of the beginning of the 2007-08 fiscal year, Newfoundland and Labrador had US$1.15 billion on the books in debt payable in American currency.

The province borrowed the cash in seven instalments - ranging from US$100 million to US$200 million - between 1987 and 1993.

One of those issues - for US$100-million, borrowed 20 years ago at an interest rate of 11-5/8 per cent - came due in recent weeks.

According to the Department of Finance, the province paid off that US$100-million debt, without re-borrowing, on Oct. 15.

Money socked away by the government in sinking funds over the years covered off more than US$89 million of the repayment.

The province had to pay the shortfall of US$11 million.

The good news is the strength of the Canadian dollar made that payment millions cheaper than it would have been even six months earlier.

And even car prices are dropping so wait before buying that new 2008. Especially if you live in Ontario and near the border. You can save a far amount thanks to the rising loonie. Add to it the supposed federal green rebate on some models, whenever that comes into effect, and the cut in the GST you can make some real savings.

One by one, the price dominoes are falling. Less than a week after Chrysler announced a series of incentives to keep your dollars from travelling across the border comes news that two more auto giants are joining in the stay-at-home fray while the loonie, already at an all-time high, continues to shatter its own marks.

Honda is planning to give you back $5,500 if you pay cash for a Pilot crossover utility vehicle, $1,500 if you choose a Civic and $4,000 on some Accords.

Ford has also put its foot on the rebate accelerator, offering to lower prices on some of its models by $7,000.

"Right now the MSRP on the car is $2,654," said Ted Hogan from Dixie Ford while talking about a deal on a brand new Fusion. "Ford has added an additional $1,200 E-bonus, they've added a $3,500 and an additional one per cent GST rebate."

Last week, Chrysler introduced a "3 For Free Program" that will see incentives put on almost all its best selling models, including 2007 Chrysler, Jeep and Dodge vehicles, along with its 2008 Grand Caravan, Town Country, Avenger, Ram 1500 and Ram Heavy Duty. Cash rebates of up to $10,750 are being offered depending on what you buy and when.

Ironically, all the rebates come at a time when Canadians are becoming frustrated in trying to buy cars in the States. Many dealers near the border have been ordered not to sell their cheaper vehicles to those from the Great White North or risk losing their franchises.

Honda and Nissan have also followed suit.

"There's also trade-in dollars up to $5,000 on some of the vehicles to try and encourage people to buy Canadian, to buy in Canada," said Honda executive vice president Jim Miller.

"Nissan is in the middle of doing all the adjustments to bring the prices down to what the market is bearing," said Dixie Nissan salesman Greg Carrasco. "We've been waiting for this, so I think it's finally going to happen."

While the Economist reminds us once again it is not workers in Canada that are unproductive, but the capitalist class. Their failure to invest can have a far more negative effect on the loonie than any other factor.

A strong currency reflects booming commodity exports and sound public finances. But not everyone is cheering

the industrialisation of China has boosted the world price of Canada's exports of oil, gas, minerals, metals and farm products. But the country has also done its housework: ten years of federal budget surpluses and a current-account surplus contrast with the twin deficits in the United States. In the end it was the “subprime” mortgage woes south of the border that elevated the loonie over the sickly greenback (or should that be the “Yankee lira”?).

Or perhaps it is Canada's weak productivity and unambitious businessmen. Company profits are healthy but investment remains sluggish. Because of the exchange rate, the price of capital goods fell by 10% over the past year, but purchases rose by only 5%, according to Philip Cross of Statistics Canada.

And then there are the naysayers. They are of course Americans.

Canada should put its loonie pride on hold

Despite the naysayers the reality is that the Loonie is getting stronger while the U.S. Dollar is in free fall. Even if the U.S. dollar rebounds the strength of the loonie may remain according to some market analysists.


Crude oil at record highs, market-wide weakness in the greenback and a rate cut by the FOMC has allowed USD/CAD to continue to fall like a rock. Most recently the pair hit a multi-decade low of 0.9328, but this support level does not appear likely to hold up as a bottom which leaves USD/CAD open to further declines. Indeed, Canadian economic data and strong oil prices support the case for additional gains for the Loonie, and Tuesday is unlikely to prove differently. Building permits are anticipated to rise 1.8 percent while Ivey PMI is forecasted to fall back to 55.0 from 56.0, but it is the latter report that has the greatest potential to be a market-mover given the risks for a surprisingly strong reading. If Ivey PMI is indeed better than expected, USD/CAD could push down through 0.9300 towards the next level of support at 0.9223. On the other hand, signs that the Canadian economy has taken a sharp hit from the Loonie’s rally could allow the pair to bounce above the 0.9400 level.


Chalk up merger-related demand for Canadian dollars as one more reason the loonie may strengthen against the U.S. dollar in the near term.

Dealing rooms yesterday were rife with chatter about the impact of the US$38.1-billion ($36.8-billion) offer by Anglo-Australian mining giant Rio Tinto RIO.LRIO.AX for Canadian aluminum producer Alcan Ltd AL.TO as the deadline loomed.

Retail investors typically wait until the last minute to tender their shares and so the currency conversions would likely take place over the next few days. Rio is going to pay off the deal in U.S. dollars, a company spokesman said. While the exact amount of the flows from U.S. dollars into the Canadian currency were far from clear, analysts said the loonie still had room to rise against the greenback as a result of the deal's timeline.

"The Canadian shareholders aren't going to want U.S. dollars, so they are going to have to convert them into Canadian dollars," said David Bradley, director of foreign exchange with Scotia Capital in Toronto. "There definitely could be significant flows."

Mr. Bradley estimated flows of U.S. dollars back into loonies would range between US$4-billion to US$12-billion. Alcan's shares outstanding are nearly evenly divided between its dual listings on the Toronto and New York stock exchanges.

The Canadian dollar has been on a tear this year, rising more than 20% to 33-year highs against the U.S. dollar. Surging commodity prices, stable growth, a robust equity market and a weak greenback have all helped the loonie. Merger-related demand has also played a role. In particular, the Rio deal, which would create the world's largest aluminum producer, has been a big driver for the Canadian dollar.

"I certainly do believe that the Rio Tinto bid for Alcan has certainly helped Canada trade to new highs," said Liz Bussanich, senior vice-president for foreign exchange at Bank of Montreal in New York.


The Return of Keynes

Loonie Tories Blaming The Victims

Softwood Sell Out

Americans Recognize Canada


If It Ain't Broke

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