Exports were at a one-year low in September, said Statistics Canada on Friday. Rising imports also shrank the surplus to $2.6-billion. Exports are slowing, but the imports of cheaper foreign goods are also soaring. Domestic exports of goods such as lumber, telecom equipment and trucks are sliding and the overall decline will likely continue, according to many economists.

The economists are also cutting their annualized growth forecasts. Well probably not a bad prediction, considering that exports make up more than a third of Canadian GDP. Bankruptcies are also sneaking their way up. According to the CIBC, business bankruptcies are growing for the first time since early 2002 and personal bankruptcies, as of September, rose at the fastest pace in more than three years. The question is, what is responsible? And if it is the high Canadian dollar, are we really headed towards a recession?

The answer is unclear, but one thing I can say for sure is that the media sure likes to exaggerate the issue. I don’t quite understand why the “soaring loonie”, and a “rising surplus” has to be instantly correlated with a “plunging outlook”. A surplus isn’t always the most wonderful thing, and imports are not necessarily ‘bad’ and ‘evil’. The fact that we can afford and purchase more products (whether they be domestic or foreign), increases our utility (our standard of living). If I remember correctly, that’s why we trade… right?

Maximizing our exports and minimizing our imports does not put our economy at its best; as a matter of fact, it makes no sense at all. A balanced, healthy two-way trade is supposed to be the objective. Having a more balanced trade for a period, or perhaps even a small trade deficit, will not kill us! America’s huge trade deficits won’t last forever; so what makes us think that our massive trade surpluses will? So there is nothing wrong with loosing a bit of ground on our surplus, and it doesn’t mean we have to expect a recession; Remember: expectation in the markets, only make the outcome more likely.

Conclusion: Don’t let these misleading headlines lead you running for the exits. The loonie has only been at par or higher for about a month and half. Its effect on our numbers haven’t even started to filter through the system yet. Until then, you could expect some more headlines like the following: “GST/PST revenues plunge as cross-border shopping takes its toll”, “Alberta beef farmers slammed by high CAD”, “Where did the yankee visitors to Canada go?”, “Americans buy less Canadian exports”, “Canadian multinationals take hit on bottom line from currency conversion”, … I think you get the point.

The currency has soared 25-percent this year against the greenback — and almost 7 per cent in the past month alone. The gains are most striking against the U.S. dollar, but the loonie is also stronger against every single major world currency this year, including the euro, the yen and the Brazilian real.

The CAD is behaving like a growth stock not a currency. Overall it is good that the CAD is stronger but the speed of the rise is somewhat concerning as there is no precedent. No period of similar growth with which we can compare what the next experience will be. Some are forecasting a disaster…

I wouldn’t predict a complete disaster; but any company trying to sell goods to the world will experience a serious profit squeeze. It is tough to set prices when the currency changes so quickly. Hedging is great, but you don’t usually hedge all your projected sales in one contract. There will be fallout from this, but it will be concentrated.

The good news for the average person is that our prices for imported goods should decline. The bad news is that the cost of heating our homes is getting more expensive as commodity prices for oil and natural gas continue to climb. It’ll be interesting to see what the inflation figures come in at in the next few months. If a higher dollar keeps inflation in check by making imports cheaper, then its a good news story.

But I think there will be a lot of people in manufacturing who will be negatively affected.

RBC, the largest international trader of Canadian dollars, raised its forecast for the currency on Friday, saying it will appreciate further to around $1.08 before declining below parity in the second half of next year.

The Canadian dollar has traded above $1.07 before, though that was before official record-keeping began.

The dollar was technically worth as much as $2.78 in the late 1800s, but that’s largely because during Canada’s early history the value of the currency was either pegged to the price of gold or regulated by the government.

• “The loonie’s flight is far from over,” said Jeff Rubin, chief economist at CIBC World Markets. “By the end of next year, you’ll get as much as a nickel back when you trade your loonies for greenbacks, the biggest premium since 1960.”
• “A much stronger domestic economy north of the border will in turn translate into divergent monetary policies in the two countries, with the Federal Reserve Board following through with another 50 basis points of easing while the Bank of Canada remains on the sidelines,” said Mr. Rubin.
• “With interest rate spreads turning against the greenback, and commodity prices buoyant, the Canadian dollar should climb to a 5 per cent premium against the U.S. dollar by the end of 2008.”

While the U.S. market is expecting a “significant drag” from its hardships in the housing market (Bernanke), the Canadian economy is expected to remain in good health; A huge turnaround from the past where Canada is traditionally, metaphorically described as the mouse who needs to run for cover when the elephant (the United States) falls / rolls over. Today we see Canada strategically positioned, and prone to economic fluctuations from south of the border.

Yes, the American economy and its dollar is sinking – BUT it does not by any stretch mean that the Canadian economy and its dollar is not soaring. The Canadian dollar is up quite strongly against the Euro, the British Pound, the Japanese Yen… as a matter of fact it’s really hard to any currency that has done better than the Canadian dollar.

What else do we need to consider before jumping up and down, across the streets? Well according to CIBC World Markets, “the strong currency combined with U.S. economic weakness has pushed manufacturing in Canada close to its lowest share of the gross domestic product in the post-war period”. The bank also expects the Canadian jobless rate to fall as low as the United States’ for the first time since 1982.

However, the recent 300,000 job loss in the manufacturing industry have been offset by job creation in other industries with lowest employment levels in decades. What next? Right now it is really up to the federal government’s budgets and how it utilizes the country’s healthy budget in order to provide positive stimulation to the challenge-faced manufacturing industry.

“Mark is eminently qualified to lead the Bank of Canada and we are confident he will provide a steady hand to help maintain the stability of Canada’s monetary system,” Flaherty said.

Mark Carney resigned from his position in Golman Sachs in 2003 to accept his post as deputy governor at the BoC, after being recruited by governor David Dodge. In 2004, he moved to the Department of Finance’s No. 3 job.

Carney did not issue comments as to where he leans on issues such as inflation, the dollar, the credit crunch and troubles in manufacturing. He did however reassure sticking to the bank’s objective to maintain “low, stable, predictable inflation”.

Carney has been appointed with a seven-year term, with a salary of $340,000 to $400,000 annually.

The federal government today announced a larger-than-expected surplus in the Canadian economy. This announcement, along with a weak U.S. home sales report, resulted in a further push on the Canadian dollar. The loonie rose higher than the U.S. dollar earlier in the session, but closed at 99.86-cents (up from yesterday’s finish of 99.58-cents).

The surplus is estimated to have raised to $14-billion in the last fiscal year, versus the original $9.2-billion forecast. The Canadian dollar rose on expectations that the surplus would lead to further tax-cuts.

I actually sense some reason for concern now… With the Canadian dollar being so high, retailers are not acting fairly. Canadians are loosing their purchasing power. As for the surplus, the difference being so huge, shows either deliberate miscalculation or lack of transparency. I was reading some articles today on the federal government saying that the creation of 125,000 daycare spots (part of their previous election platform) ‘may not be realistic’. With such a huge surplus, I’ll find it surprising that such a promise remain unfulfilled.

It’s time the Canadians retain some value on their success over the past years. The country and its economy has definitely been successful, but there will come a point where Canadians will be fed up; Fed up of not enjoying the fruits of their labour. In order to continue, further develop, and distinguish the Canadian identity on the global marketplace… where do we start? The root is the average Canadian; And if he/she is not provided with adequate incentives or does not see the results of his/her increased productivity… Ultimately, how far will Canada advance? Probably not too far beyond its own borders.

Don’t get me wrong, I do believe the Canadian economy has been proven very strong in the recent past – BUT this is not where we ought to stop…

A report released Thursday by BMO Nesbitt Burns, a unit of the Bank of Montreal, estimates that products are priced 24 percent higher in Canada than in the United States despite the Canadian dollar’s steady five-year march to parity with the United States dollar.

Retailers say there is a big lag time for events that affect pricing because most merchandise on store shelves was purchased six to 12 months ago. This obviously wouldn’t be the case, were prices to increase. Like I’ve said… prices are sticky downwards.

“For Canadians to believe that our prices will be at par with American prices under any circumstances is not realistic. Americans have 10 times the purchasing power. That’s the reality.” –Diane J. Brisebois, president of the Retail Council of Canada

Currency performance aside, Canadian retailers pay more for goods because their market is one-tenth the size of the United States, said Diane Brisebois, president of the Retail Council of Canada.

“We don’t suspect that the price differentiation will disappear ever, and that is simply based on economies of scale,” she said. “If you buy a dozen doughnuts you get a better price than if you’re buying a single.”

The real danger is how the Canadian economy will be affected by the Canadian traveling south of the border to do his/her shopping, and the American consumer who will no longer come to Canada to shop. How will we respond to this? …the challenges to an economy of prices being sticky downwards…

Canadian-American dollar parity

Part of the loonie’s growing strength recently is a result of strong demand for oil and metals amid strong global demand for those commodities. Another very important, and underrated factor, is the weakness of the U.S. dollar. The U.S. dollar has been very weak due the recent slowdown in the housing sector that has been spreading to other parts of the U.S. economy and worldwide.

For more information, see the effects of a high Canadian dollar.

• China sold $312.2-billion (U.S.) worth of merchandise to the United States between Aug. 1, 2006, and July 31, 2007, while Canada shipped $305.6-billion, trade statistics show.
• The U.S. shipped $237.5-billion to Canada over the same 12-month period from August, 2006, to July, 2007, while it only sold $59.7-billion to China.

For the first time did China’s shipments to the United States surpass Canada’s. Lets face it… China is advancing at an incredibly fast pace. The safety/other issues of Chinese exports probably won’t stop them. And the Canadian dollar rising, is only making Canada less competitive in the U.S. So should Ottawa exert its efforts to open up new markets worldwide, or should it redouble its efforts on its existing relationship with Washington to keep borders open and dodge restrictions to bilateral trade?

Wait a minute… who said this is a bad thing. Maybe it’s something that needs to happen in order for growth and development to continue in Canada. Maybe this is a sign that Canadians are not willing to be “relaxed” and “laid-back” anymore, versus traditional beliefs. Maybe Canadians are tired of being bullied by the American economy.

• Canada has been growing in the financial services, engineering, telecom, etc. – where Canadian export strength has been growing.
• Canada has become less dependant on the U.S. market, with sales to the United States dropping over the past seven years.
• As a share of Canadian exports, sales to the U.S. have declined to 75 per cent from an all-time high of around 85 per cent back in 2000.

Maybe this is why the Canadian economy had been strong throughout the hardships in the U.S. economy during the past few years. Sure China is penetrating deeper into world markets, but more importantly, maybe we finally are heading towards a strong, diversified, Canada.

The Canadian dollar

Whatever the case may be, there are many other issues to consider. Many foreign countries are looking to reduce their holdings of US dollars for a variety of reasons. Countries like Iran, and even European nations and Japan are looking to move commodity trading to other currencies, such as the Euro or Yen. Many other countries hold so much US dollar debt that they do not want more US dollar exposure.

While on the other hand, the Canadian dollar may be volatile, but its position as being one of the most appreciating currencies in the world, not just against the USD, is backed by strong fundamentals including a growing demand for our commodities, a strong economy and well managed finances.

We are well past those days where we could simply put Canada and America side-by-side to forecast their respective currencies against one another.

Let’s take a look at some of the effects of a strong Canadian dollar:

• Canadian exporters lose ground because their products become more expensive for U.S. buyers
  • Since 2002, Statistics Canada says 189,000 manufacturing jobs have disappeared in Canada. The agency places the blame squarely on the soaring loonie.
• Canadian exporters will need to improve efficiency and innovation in order to sell (a good thing), rather than relying on a cheap loonie
• Canadian companies can invest more in U.S.-made tools to help improve efficiency and competitiveness
• As the Canadian dollar rises, the cost of repaying U.S. dollar debt falls
• Canadian visitors to the U.S. will find their money buying a lot more south of the border
• Conversely, U.S. visitors to Canada will find their money buying less here

A mortgage given to a home-buyer with less than sufficient credit, or who lacks a proven income source to support loan payments. Lenders with excess money in the U.S. were giving loans to almost anyone who asked – charging a little more interest in return for the riskier loans. The lenders made their bet on (U.S.) house prices to rise. Well, that’s not exactly what ended up happening. When housing prices began to fall, and interest rates started to rise, many borrowers wound up in trouble – causing to default on their loans.

How did the problem spread to Canada, and the rest of the financial world?

Many of the lenders (American Home Mortgage, HSBC, …) were selling the loans to other parties, including hedge funds and pension funds – who were also looking for higher returns. The subprime loans were bundled and sold to third-party investors. As the loans started to go bad (and default), people all across the financial world were affected. As others were affected, concerns over losses started to grow. The concerns causes investors and lenders to ask for higher rates, or stopped activities completely – the concept of the credit crunch.

What is commercial paper?

Commercial paper is short-term debt (with maturity dates less than a year) issued by companies. Institutional investors – money-market mutual funds, low-returning funds, etc. – tend to be the largest buyers of the market. As a result, only highly rated companies with strong balance sheets can generally issue commercial paper, limiting the size of the market.

What is asset-backed commercial paper?

Asset-backed commercial paper is exactly what it sounds like. Commercial paper, backed by assets such as car loans, mortgages and credit-card receivables. Which companies are involved? Trusts and other financial companies; the one’s you’ve probably heard on the news – Conventree Capital, National Bank of Canada, and so on.

So what’s the problem in the commercial paper market?

As concerns about the housing market bubble about to burst grows, portfolio managers at money-market mutual funds are doubting the investment in asset-backed commercial paper – especially those backed by assets such as mortgage loans. In consequence, this leaves the trusts short of cash, because no one is willing to buy their paper. Other banks are providing loans, and central banks are helping to provide liquidity.

What about my money-market mutual fund?

If your money-market mutual fund has invested in a trust that’s in trouble, it could spell out losses for the fund, and ultimately you – the investor.

Reminder: this is only a small portion of the market that’s in trouble, and not every money-market mutual fund holds paper issued by the trusts in trouble.