Q. Is A Strong Canadian Dollar A Good Thing?
This is an interesting question. The effects of an appreciation are good for some aspects of the Canadian economy, but, create problems for Canadian exporters.
- The real winners are Canadian consumers who are able to buy US goods at a much cheaper price. US border towns are reporting booming trade as Canadians make the short trip across the border to buy more goods.
- example: Disney World trip: Oct 2006 cost C$3,839. In Oct 2007, the same holiday would cost C$3,428
- Steak dinner in Detroit : Oct 2006 cost C$129. In Oct 2007 C$107
- The real losers are Canadian exporters and the Canadian tourism industry. The appreciation makes Canadian goods and services appear more expensive to US consumers.
- Exporters are seeing their profit margins squeezed as the US price of their exports increase. There is only so much that profit margins can be reduced and so most exporters have been forced to raise their price.
However, it is worth noting not everything is doom and gloom.
- Exporting to non US countries is mainly unaffected. The strength of the loonie is mainly against the US dollar and not the EURO and Yen. Unfortunately, most of the Canadian trade is with the US.
- The effect of a strong loonie, depends on the price elasticity of demand. If demand is inelastic then a strong dollar will only cause a small % fall in demand. It is worth remembering that part of the loonie’s strength is due to the strong demand for Raw materials. Demand for these exports is very inelastic
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Many other countries’ currencies such as Hong Kong’s and Macau’s are tied to the American dollar.
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