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How is the Canadian Dollar at Parity going to affect Waterloo Companies?

John Jung

Two years ago we had this question in front of us and it appears we have it in front of us again. But this time surely companies will have had the time to deal with this as we have been hovering in the mid-90 cent exchange bracket ever since and if a company would have closed their shop, they likely would have done so by now, for many other reasons besides the impact of the rising dollar.

Many Canadian firms have likely have or should have hedged their foreign currency positions to be able to deal with the situation in front of us today. In fact with an ever-rising dollar, many firms would have likely been able to afford foreign content as part of their manufacturing process or content in their product, so their overall cost to produce an export-oriented product should have decreased.  In addition, over the years as the Canadian Dollar has edged up to parity or near parity it has cost companies in Canada less to have US affiliates, generating US revenues. Inter firm trades and transfers have not significantly been affected by exchange rate fluctuations. But it is nevertheless a psychological level that makes us reflect on whether this is a good thing or not for Canadian companies.

The robust appreciation of the dollar has actually been happening for several years since its low at 63 cents on March 27, 2001.  

However, many new companies have established themselves in the intervening years with an enhanced and very robust Canadian dollar in their corporate wallets. They have established links with firms, especially in the United States or around the world that sell their imports in US dollars and have, or should have, accounted for that in their prices of products for which they export back across the border.

I am told that on average, Canadian exports today contain about 40% or more of import content, which they are now paying in near parity dollars as opposed to the high exchange rates for these dollars back about a decade ago. A significant proportion, up to 80% of machinery and equipment used in the production processes in Canada are also imported and usually paid for in US dollars. Consequently a higher Canadian Dollar lowers the cost of capital investment in these imported parts and equipment, mainly from the USA and abroad.

Another way to look at it is in market share. The higher Canadian Dollar means that the cost of the Canadian-made product to the US customer increases, resulting in lower sales. In order to maintain market share, the company would have had to lower their price in relation to what they were receiving from the sale of the product before the dollar increase. But with fewer Canadian dollars relative to the US Dollar, their total revenues would decrease, and so would their profits.

Accordingly companies across the Waterloo Region will feel the sting of the Canadian Dollar’s rise, but as they say, what doesn’t kill you makes you even stronger.  This is not to make light of the subject but to reinforce that those companies that are vulnerable, will have been vulnerable before and needed to make adjustments a long time ago. Those that have survived will be able to compete head to head with anything that moves across the border.

In fact, some industry sectors will fare better than others due to fundamental issues in the DNA of their business. If they are more dependent on the export market, they might have a harder time than those that can produce their product entirely with Canadian made parts and equipment as well as those that are not as dependent on export. For example companies that are highly dependent on export sales such as wood products (furniture) may find it more difficult than the food and beverage industry which has a local market as well as not dependent on import content. So, companies involved in transportation equipment, metal, electrical components, fabricating and plastics, may have a much more difficult time of it than printing, textiles and food.  But not only does the manufacturing sector tend to get hit with the rise of the dollar. The service industry, especially those that export or are dependent on US spending habits, such as Tourism, may be heavily impacted.  The Canadian Dollar makes it more expensive for international travelers to spend money in Canada, and the tourism industry has little margin in being able to lower its prices.

While export dependent manufacturing and service industries will suffer, there is a group that may in fact gain through the robust increases in the Canadian Dollar. The average citizen is one of them, especially those that travel abroad or spend half the year as Sun-birds in southern states. They will also eventually benefit from lower prices in Canada as existing supplies dwindle and products with new prices are restocked in Canada.

Another group may be the service industry that is oriented toward the domestic market. These include the finance sector including insurance and banking as well as education and real estate. Many purchase computer equipment, software and related equipment and services from abroad, making it less expensive for them to purchase them.  Another group that benefits are the companies that attract talent, especially from the USA or abroad, such as high-tech firms and universities attracting international knowledge workers. And finally all those sports teams that pay big salaries in US dollars! So while we know that there will be pressure on many companies during this period of a robust Canadian Dollar there is a silver lining for some participants in our economy that have hedged their foreign currency positions, set up partnerships with US firms or are able to benefit from purchasing with their new “parity dollar”.

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