With the Canadian dollar expected to continue its downward spiral well into the summer, Canadians may find themselves out of luck went it comes to bargain hunting south of the border.
“Things are necessarily going to be more expensive,” said Nick Bontis, an associate professor at the DeGroote School of Business at McMaster University.
“The timing is not the greatest either. Face it, we’re entering into summer right now. The weather is getting better. People are willing to take road trips… (but) if you’re just crossing the border because you want to buy clothes or a pair of shoes for your kid — at the end of the day, it doesn’t make any economic sense.”
On Friday, the loonie tumbled to its lowest level in more than 18 months, dropping 0.76 of a cent to 95.64 cents US.
The falling Canadian dollar has largely been attributed to the U.S. greenback, which has found strength following an announcement last week from the U.S. Federal Reserve confirming that the end is near for its $85-billion-a-month bond purchases.
The central bank’s quantitative easing program has resulted in stimulus being pumped into the U.S. economy since September, which has resulted in U.S. stock market indexes hitting all-time highs.
But as investors prepare for the demise of the Fed program, the value of bond yields have increased, causing the American dollar to gain strength.
Bontis said the Canadian dollar is sensitive to the performance of its American counterpart.
“It’s not so much what will make the Canadian dollar stronger, it is what will make the U.S. dollar weaker?” he said.
“What a lot of people fail to realize is that when you look at currency, it’s our dollar versus another dollar. It’s not just our dollar on its own. You can’t really comment on the implications with the Canadian economy, as much as you can comment on what’s happening with U.S. stimulus.”
Bontis said a weakened dollar does not bode well for cross-border shopping, especially as more Canadians decide to spend their money at home now that popular U.S. retailers like discounter Target have opened their doors here. Meanwhile, upscale chain Nordstrom is expected to arrive next year.
“There is always going to be a market for individuals to cross the border but the extent to which consumers can find real significant deals and real unique selection that is not available here… I think that is going to start to fall because of Nordstrom, Target and obviously the dollar,” he said.
Economists mainly agree that the loonie’s descent is perhaps only beginning, with no signs indicating that it will reach parity in the near future. The last time it was at those levels was in early February.
“It’s difficult to time the market but we don’t see any snap-back rebound of the Canadian dollar any time soon,” said Emanuella Enenajor, an economist with CIBC World Markets.
“We could see it stay at these weak levels. There are concerns… that could keep the Canadian dollar weaker than parity for some time.”
Shaun Osborne, chief currency strategist with TD Securities, says the bank is predicting the loonie will fall to as low as 90 cents US by the end of the year, which shouldn’t be a surprise once quantitative easing is officially clawed back.
TD said the loonie has been overvalued for some time now, pegging its fair value around 94 or 95 cents US.
“One of the desired outcomes of quantitative easing is very depressed levels of volatility to encourage investors to climb up the risk curve, to encourage investors to put money at work in the high risk assets,” said Osborne.
“While the Fed has been pumping liquidity into the system, volatility has been depressed. You can argue, artificially depressed because of QE. So as QE is being withdrawn, we’d expect volatility to return to somewhat more normal levels.”
Bontis said there are few indicators that the U.S. greenback will fall in the next few months and hurl the Canadian dollar upwards.
“If the loonie goes up this summer, in my opinion, it will have nothing to do with the Canadian economy but more so with something that has happened in the U.S. economy,” he said.
“(There needs to be) some sort of destabilization, maybe there is some kind of global event like a hurricane, terrorist attack, those sorts of things. It’s those types of macro events that weaken U.S. dollar.”