Effects of the Strong Loonie

The strengthening loonie has had an opposing impact on domestic importers and exporters. Some 44% of medium-sized Canadian businesses polled by BMO reported little or no impact from the currency movements. Many businesses have already had to adjust to a stronger currency, to shift their supply and distribution chains accordingly and move up the value chain. Conversely, Canadian exporters continue to face headwinds stemming from weakening competitiveness. As the loonie remains strong, it will adversely affect exporters and certain manufacturing sectors. Research by National Bank of Canada estimates that a 5% rise in the CAD to US$1.02 would narrow chemical, furniture and transportation equipment industries margins; meanwhile, profit margins will rise in motor vehicles, paper and the electronic equipment and appliances sectors. National Bank attributes the difference to the different exporting profile and proportion of expenses (labor, intermediate goods) priced in USD.  In practice, it is the volatility of the currency rather than the strength that poses the most significant problems for businesses, as it forces them to continue to adjust.

Editor’s Note: This post is excerpted from a much longer analysis available exclusively to RGE Clients:North America Focus: U.S.: Lower Chance of ‘W,’ But Slow Road to Recovery; Canada: Trade Balance Stays in Red

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