The Canadian dollar has been in news headlines a lot lately for all the wrong reasons. How low can the Canadian dollar go? The loonie is fresh off an 11-year low last week. Weak GDP growth, coupled with the falling price of oil, has had the loonie on a freefall in recent months. While a low Canadian dollar is good for some, it’s bad news for others. Let’s take a look at the pros and cons of a low loonie and how it affects the average Canadian.
1. Manufacturing and exports
Ontario’s economy has been struggling over the last few years, especially in its manufacturing industry – which has traditionally been the bread and butter of the province. Ontario went from being a have to a have not province. In recent months it has been a change of fortunes, as manufacturers and exporters have been benefiting from the low loonie. A low loonie means companies from the U.S. (and others around the world) are more likely to consider moving their manufacturing to Canada. It also means Canadian goods are less expensive for our international trading partners to import into their own countries, which then leads to an increase purchases and exports.
While a low Canadian dollar is bad news for travellers to the U.S. and snowbirds, it’s good news for our tourism industry as a whole. A lower Canadian dollar means it’s cheaper for travelers coming into Canada. This should provide a major boost for our tourism industry as they can now buy more with their money, which generally leads to a boost in sales for goods and services.
How you fair as an investor depends on whether you’re buying or holding U.S. investments. Investors who are buying U.S. investments will come out on the losing end. However, if you’re already holding U.S. investments, you’ll come out ahead. That’s because there’s an inverse relationship between the Canadian dollar and U.S. investments. When the Canadian dollar falls, the value of U.S. investments rise, and vice-versa.
1. Higher gas prices
With oil prices reaching a 5-month low at $45 a barrel last week, many motorists are left scratching their heads why gas prices are so high. The low Canadian dollar is to blame for higher prices at the pumps. With crude oil and wholesale gasoline priced in U.S. dollars, it costs a lot more loonies to fill the tank in your vehicle.
2. Travelling and cross-border shopping
If you’re thinking of heading down south to do some cross-border shopping this year, you better think twice. While the last few years have been a boon for Canadian travelling to the U.S. who enjoyed a dollar near par, it’s a different story this year. If you’re planning to drive across the border (removed words here), higher gas prices coupled with a weak loonie means it’s going to cost you big time. A lower loonie also means the price to fly is more expensive. Unless you have the itch to go abroad, you’re probably better off travelling within Canada this year.
3. Canadian retailers
Perhaps the most noticeable effect of a lower loonie is taking place down grocery store aisles. The cost of food has risen by 3.4 percent between June 2014 and 2015, according to Statistics Canada. If you’re planning to have a summer barbecue, you better check your budget. The price of meat has skyrocketed. Prices for goods have also increased in department stores. Canadian retailers who import goods from the U.S. have no choice but to pass on the cost increase to Canadian consumers.
With the dollar and interest rates at such lows it is very easy to start accumulating debt without realizing it. It is even more important to have a cash flow plan to ensure you can stretch your income. Cash flow planning is one of our specialties so feel free to contact our office should you require some assistance.