Loonie drop is a reflection of economy

“Derek, why is the Canadian Dollar so much less than the US Dollar?” Since we typically use Canadian dollars on a day-to-day basis the change in value compared to other currencies should matter all that much. However, with that in mind many of us travel, own property outside of Canada, run a company, or partake in online shopping and the value of our dollar is important. Compared to this time last year, our loonie has declined roughly 16% when compared to the US greenback. So what’s causing this?

“Derek, why is the Canadian Dollar so much less than the US Dollar?”

Since we typically use Canadian dollars on a day-to-day basis the change in value compared to other currencies should not matter all that much. However, with that in mind many of us travel, own property outside of Canada, run a company, or partake in online shopping and the value of our dollar is important. Compared to this time last year, our loonie has declined roughly 16% when compared to the US greenback. So what’s causing this?

To understand the movement of our loonie we need to understand that in very simplistic terms, the value of a country’s currency is a gauge of the health of the economy. Said another way, our Canadian dollar is lower because our economy isn’t performing near as well as the US economy.

It’s also important to understand that central banks have the ability to change interest rates to guide their respective economy accordingly. In Canada, our central bank is referred to as the Bank of Canada. As our economy begins to cool, the Bank of Canada may decrease interest rates to encourage spending and business development. The intent here is ultimately to produce jobs which in turn should boost the economy.

So thinking back to this time last year, the Canadian economy was doing well and the price of oil was hovering around $100. Compared to today, oil is closer to $50 and there have been a notable slow-down in the energy sector. The decline in the price of oil has a direct impact to our economy.

The Bank of Canada with this information in mind decided to reduce interest rates. This rate cut occurred in January which brought our already faltering loonie from around 84 cents to 80 cents in a matter of days. In very basic terms this signalled that the Bank of Canada was worried about our economy which pushed the value of our currency lower.

All of this has brought our dollar trading at less than 80 cents. On one side of the coin, this is good for companies that sell their goods in US dollars. Their production and labour costs are still in Canadian dollars, but their product sells for US, thus giving them a 20 cent per dollar advantage that they didn’t have the year prior. That said companies which import goods in US dollars to sell to Canadian consumers have either had to increase prices, or decrease profits, or both.

Furthermore, and where it is noticeable for many of us, that trip to Disneyland is now 16% more expensive as are all those goods we buy online and ship north to Canada. To a certain extent, this is also why the price at the pump is higher too. Generally speaking Canada buys all its fuel in US dollars, which in turn means lofty rates at the gas station. Looking ahead, I don’t expect this trend to change. In fact, I wouldn’t be surprised to see the Canadian dollar decline to $0.75 or lower within the next 12-months. The US economy will likely continue to strengthen while our economy works through the issues with the price of oil among other challenges. In fact, another rate decrease may be right around the corner which won’t help the loonie.

With this knowledge in hand, if you have a trip upcoming you may consider buying US dollars sooner than later. Otherwise you could postpone that trip south of the border and travel across Canada instead; there are many wonderful destinations within our borders and currency won’t be an issue.

From an investment standpoint, it may be prudent to hold more US dollars, although this would require a discussion in terms of your risk tolerance and investment goals.

While it’s difficult to predict the movement in currency a weakening economy tends to create downward pressure. With all this in mind, none of us have any control over how currency will move and as such the best we can do is plan accordingly.

Happy investing,

Wealth Watch is written by Derek Fuchs, a wealth advisor with ScotiaMcLeod in Red Deer. It is provided for informational purposes only and any opinions contained in it are his own. Readers are urged to consult a wealth advisor for help with their personal investment circumstances. Fuchs can be contacted at derek.fuchs@scotiamcleod.com.

Just Posted

Man from Olds killed in collision near Sundre

A 39-year-old man from Olds was killed in a collision near Sundre… Continue reading

Tips to keep crime at bay this Christmas

’Tis the season for joy and celebration, but the Christmas season can… Continue reading

Olympic ski run designer creates upgrades at Canyon Ski Resort

Jeff Ihaksi says free-style and alpine ski venues are Canada Winter Games-worthy

Updated: Collision expert backs version of crash of driver accused of manslaughter

Daniel Newsham accused of manslaughter in fatal 2016 collision

WATCH: More than 100 protest UN migration pact, carbon tax in Red Deer

Chants of “Trudeau must go” echoed through the streets of downtown Red… Continue reading

Tkachuk’s goal in 3rd gives Flames 2-1 win over Wild

ST. PAUL, Minn. — Matthew Tkachuk scored the go-ahead goal midway through… Continue reading

Women use scent to lure wolf-dog that ran away from Calgary airport

EDMONTON — A woman from Alberta is thanking an unconventional strategy for… Continue reading

Suspect in Alberta, Saskatchewan bank robberies to get mental assessment

MEDICINE HAT, Alta. — A former Winnipeg broadcaster and journalism instructor accused… Continue reading

Trudeau to make it harder for future PM to reverse Senate reforms

OTTAWA — Justin Trudeau says his government hopes to make legal changes… Continue reading

No winning ticket for Friday night’s $60 million Lotto Max jackpot

TORONTO — There was no winning ticket for the $60 million jackpot… Continue reading

All evacuation orders lifted in deadly California wildfire

PARADISE, Calif. — All evacuation orders have been lifted in Paradise more… Continue reading

All aflutter about our feathered friends

Christmas Bird Count will be held Dec. 23

Baylor ties pervade rape case that sparked uproar

DALLAS — The Texas judge who approved a plea deal allowing a… Continue reading

Most Read