Loonie gain not likely to shrink exports
Economy is better equipped to handle a stronger currency than it used to be, expert says
The Canadian dollar didn’t boost manufacturers as much as some hoped on its way down. That probably means it won’t hurt them as much as feared on the way up.
The loonie hit 80 cents (U.S.) for the first time in more than a year on Monday, up about 10 per cent since early May, raising concerns that manufacturing exports could shrink just as they were beginning to gain traction. But the Canadian economy is better equipped to handle a stronger currency than it used to be, said Benjamin Reitzes, director of Canadian rates and macro strategist at BMO Capital Markets.
“We’re not as sensitive to the exchange rate as we once were,” Reitzes said in a phone interview. “Because the global economy and manufacturing in particular is so globally integrated now, over time that exchange-rate factor matters a little bit less than it did 10 or 20 years ago.”
Like many major economies, manufacturing has shrunk in Canada as a growth driver. The last time the loonie started a long-term appreciation cycle in late 2002, manufacturing accounted for about 14 per cent of the economy. Today, that number is 10 per cent.
Winnipeg-based New Flyer Industries Inc., the largest transit bus manufacturer in North America, is typical of a Canadian company building out its continental footprint. It now has a significant amount of operations in the U.S. after an acquisition spree south of the border and reports in U.S. dollars.
Approximately 88 per cent of the company’s revenue was U.S. dollardenominated in the first quarter and most of its material costs are also in greenbacks, wrote Jon Koffman, head of investor relations, in an email.
For those costs that are denominated in Canadian dollars, New Flyer enters into foreign-exchange forward or option contracts to hedge against fluctuations. The shares have returned almost sevenfold, including dividends, in the past five years.
According to data compiled by Bloomberg, the 13 Canadian companies on the 26-member S&P/TSX industrials index that break out U.S. revenue generate 40 per cent of their sales south of the border, on average.
Of course the loonie is appreciating for a reason. A strengthening economy on both sides of the border is boosting employment, revenue and profit at Canadian companies. Merchandise exports hit a record high in May, exports to the U.S. have never been stronger and central banks on both sides of the border have been tightening monetary policy.
Still, the Canadian economy isn’t immune to a higher dollar.
“The dollar obviously affects our earnings,” said Keith Creel, chief executive officer of Canadian Pacific Railway Ltd. “There are puts and takes with the dollar. The grain harvest is my biggest concern. We will know by the end of the third quarter. By that point we will understand the effects of the strengthening Canadian dollar as well.”