The Amazing Canadian Dollar

Winter 2007 CSANews Issue 65  |  Posted date : May 22, 2008.Back to list

The banks came very, very close to running out of money – U.S. money, that is. U.S. dollars were in very short supply in Canada for a few short days in November, when the Canadian dollar breached $1.10 U.S. This new record far eclipsed the historical high reached on August 20, 1957, when the Canadian dollar was worth $106.14 for each $1.00 U.S.

Canadians lined up at their banks, called the currency exchange brokers and generally just did everything they could to get their hands on some U.S. dollars at this new, ultra-cheap exchange rate. Companies that wanted to lock in their costs in the U.S., cross-border shoppers planning their next trip and snowbirds preparing for a winter in the sun all put tremendous pressure on the system of exchange. Some exchange companies were stating that demand had increased by 400% over last year at this time.

This massive demand for U.S. dollars, in itself, helped cause the exchange rate to drop again; it now sits at around $1.02 and is wondering what to do next. For snowbirds and vacationers thinking of a trip to the U.S., it is a miracle. For Canadian manufacturers and exporters, it is a nightmare. Over the past few years, their costs have increased by about 50% and many are in dire trouble. I believe that the Canada-U.S. Auto Pact might even have difficulty maintaining the status quo.

So, what's next? Why China and India, of course. China's population is hovering at around 1.25 billion and India is closing quickly with in excess of 1 billion. That is getting fairly close to half of the world's population (about 6 billion) and their standards of living are increasing at a torrid pace. This means that they will be buying things; billions and billions of dollars worth of things. First shoes, then TVs, then cars, then homes. The demand for the oil and commodities required to make these items seems to me to be ever-increasing. My guess is that Canada will do fairly well in this environment. And while the going is good, so to speak, I would sincerely hope that our governments take this amazing opportunity to pay our national debt down to ZERO.

Now let's look at the United States. They are mired in a never-ending financial crisis with the housing "slowdown," the credit crisis and a very, very expensive war in Iraq. There is also another expensive war/rebuilding going on in Afghanistan, but the enlightened TV stations have forgotten about this one. The reality in the U.S. is that they have massive deficits to overcome, they are printing money at a torrid pace (there's that word again), and the more they print, the less each dollar is worth.

Just looking at these two very simplistic prospects, does it not make sense that we will see a stronger Canadian dollar in the next few years? Now let's look at a few other comparisons. The euro is trading at about $1.50 to the U.S. dollar. What are the reasons that make the euro worth 50% more than the Canadian dollar? The British pound sterling is trading at about $2.00 to the U.S. dollar. Why is a British pound worth double the value of a Canadian dollar? A thousand economists have a thousand different answers, but I do not have a clue what they are and what any of them mean. In my simple view, it must have something to do with the amount of money in circulation in each country, and what that money will buy. A government that runs at a surplus does not have to print money, therefore, their currency should get stronger; a government that runs in deficit must print lots of money and their currency should become weaker.

I almost forgot a very important factor – emotion! When I speak to Canadians, I find a sense of optimism, that things are good, that the future is bright. In discussions with our American friends, it is the exact opposite. The wars are taking their toll, the political infighting is absolute insanity and everything that they are buying is more expensive due to their depreciating dollar. Filling up their gas tank is now a decision to make, not just an automatic expense. These emotions often prove to be a predictor of the future.

Part of the reason for the prior Canadian-dollar discount to the U.S. dollar was the international uncertainty created during the FLQ crisis in the 1970s. With the formation of the Parti Québécois and the referendum, the world thought that we were a riskier place in which to invest and therefore discounted our dollar. That risk also seems to be abating and this is another factor contributing to the dollar's strength.

Where our dollar goes from here is certainly not clear, but the facts seem to be pointing to a stronger dollar, perhaps much stronger. As a person who spends time and money in the U.S., I did not line up at the exchange wicket. I have been transferring money on a monthly basis for many years under the Canadian Snowbird Currency Exchange Program. This has proven to be a winning strategy for more than 10 years. It is similar to buying a mutual fund each and every month in order to average your cost base. Until there are some dramatic shifts in economies or other major factors, I will continue with this plan.

On the travel insurance agenda, Medipac has been able to offer millions of dollars in credits to our best clients, we have wrestled the U.S. medical inflation rate to a standstill, we have opened up our plans to more and more people with serious health problems (enabling them to travel with financial security) and we have reduced rates for thousands of people by changing classifications. All of this stems from two factors – our unending struggle to tame foreign health-care systems AND the strong Canadian dollar. Let us enjoy our sunshine and, if I am right on the dollar's direction, rates will be going down next year.

And, just so you know, the real record for the Canadian dollar was $2.65 in the summer of 1864. Funnily enough, the U.S. was in the midst of the Civil War and was printing money called "greenbacks" to fund it. The gold standard had been suspended during this period. Does any of this sound familiar?