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Analysts: strong loonie here for awhile


April 7, 2010
By By Julian Beltrame The Canadian Press

April
7, 2010 – The loonie returned
to parity for the first time in 20 months Tuesday, but analysts and
retailers
say Canadians shouldn’t expect to see price parity in stores.



April 7, 2010 – The loonie returned
to parity for the first time in 20 months Tuesday, but analysts and retailers
say Canadians shouldn’t expect to see price parity in stores.

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Buoyed by strong Canadian
fundamentals and the currency’s upward momentum, the loonie hovered around
parity with the U.S. dollar most of the day, reaching as high as 100.12 cents
U.S., before settling a fraction below the line at 99.88. But economists say it
is only a matter of time – maybe days – before the currency stakes its ground
above the line for an extended period.

“Canada is the new Switzerland of
stability, but with domestic assets the world wants,’’ said Derek Holt,
vice-president of economics with Scotia Capital, in reference to the country’s
commodity riches, including oil. “We have the Canadian dollar appreciating
another five or six cents as we go off into next year. My gut is we’re stuck
with a strong currency for an extended period of time and that can last
years.’’

Mark Beazley of the Retail Council
of Canada said parity will inevitably lead to pressure on retailers to match
prices on everything from clothes to electronics to automobiles with the U.S.,
in part because the comparison is easy to make. But he cautions that the value
of the currency is only one of many factors that determine prices. “Canada is
one-tenth the size of the U.S. market so Canadian retailers aren’t getting the
volume discounts their American counterparts are getting, and we have higher
labour costs, higher import taxes, unique (bilingual) labelling
requirements  …  all these go into the price of goods,’’
he explained.

Still, Beazley said retailers will
have no choice but to drop prices if the currency remains strong, even if it
isn’t by as much or as quickly as Canadians would like.

Analysts said the adjustments could
take months or even years – as they did the last time the currency rose to and
above the U.S. dollar in the fall of 2007.

Bank of Montreal economist Douglas
Porter began tracking prices on both sides of the border when the two
currencies first approached parity and found on average, Canadian prices were
24 per cent higher. Even eight months after parity was breached, it still cost
about 18 per cent more for most goods north the border.

But last July, the last time he
compared prices, Porter said in real terms the price differential had narrowed
to only seven per cent. Some items, like gasoline and some fresh fruits and
vegetables, prices adjust to currency fluctuations almost immediately, he said.
“(But) other things like cars, it’s lumpy (because) prices are set once, maybe
twice a year.’’

Books are also notoriously slow to
adjust.

In 2007, consumers showed little
patience and at times anger with the tardy response by retailers, many choosing
to take their business elsewhere. Cross-border crossings by Canadians increased
by 14 per cent, according to one calculation. With anger growing, Finance
Minister Jim Flaherty summoned retailers to Ottawa to justify the price gap,
going so far as to encourage Canadians “to shop around’’ if they weren’t
getting a fair price.

Beazley said he has not seen
indications of a comparable level of consumer dissatisfaction so far, although
it is early.

Holt says parity now has a different
feel from two-and-a-half years ago, including the fact the price differentials
are narrower than they were then and the corporate sector appears to be better
prepared. Certain industries will still be under pressure, he said, including
the forestry sector, which exports most of its production to the U.S., some
manufacturers, and tourism.

But he says many manufacturers have
made adjustments and some will be outright winners from a strong currency.
These include natural resources, since the currency strength reflects higher
commodity prices, and for Canadians with a steady job, a strong loonie
represents a back-door pay increase in terms of their purchasing power.

At the microeconomic level, a strong
loonie is good news for big league sports teams that pay salaries in U.S.
dollars, vacationers and anyone looking to buy outside the country, whether
it’s a business, vacation home or clothing. “There are definitely winners and
losers, but it’s not as one way in terms of its consequences as it was 10, 20,
30 years ago,’’ Holt said. “The economy has evolved and changed in profound
ways.’’

Even Ontario, where the currency
appreciation is likely to be felt the most due to the province’s
export-oriented manufacturing firms, Premier Dalton McGuinty acknowledged the
impact will likely not be as severe as it might have been in the past. That’s
because many firms, particularly the auto sector, is integrated with the U.S.

“I’d like to think that we’re in a better position than we have been in
the past when it comes to addressing the negative consequences of a rising
loonie,’’ he told reporters, adding there’s not much either his government or
Ottawa can do to influence the value of the currency in any case.


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