Monday, July 16, 2007

Surging loonie causes flap in US-Canada trade

Surging loonie causes flap in US-Canada trade
By Bernard Simon in Toronto
Copyright The Financial Times Limited 2007
Published: July 16 2007 02:47 | Last updated: July 16 2007 02:47

As sales manager of a Mercedes-Benz dealership in Buffalo, New York, 20 miles from Canada, Irene Connors has experience of the pain and the gain caused by the soaring Canadian dollar.

The surging loonie, named after the loon bird on the one dollar coin, has put a dent in Ms Connors’s shopping trips to Toronto, a two-hour drive away.

The currency hit a 30-year high of almost 96 US cents last Monday, heightening speculation it is headed for parity with the US dollar for the first time since November 1976. The loonie hit a low of 62 US cents little more than five years ago.

Mr Connors used to drive to Toronto once every two months but a trip last weekend was her first in almost two years. “It doesn’t make it as much of a bargain when the money is at par,” she says.

On the other hand, Mercedes-Benz of Buffalo is one of many US car dealers – some as far afield as Chicago and New York – inundated by Canadian buyers seeking to take advantage of a widening gap between US and Canadian car prices.

Canada’s registrar of imported vehicles issued 112,800 import permits last year, 55 per cent more than 2005. The number jumped by another 29 per cent in the first half of 2007.

Ms Connors estimates that, thanks mostly to the shifting exchange rate, an S-Class Mercedes saloon costs C$20,000 ($19,000) less in the US than in Canada.

So strong is demand that, in a move to protect Mercedes dealers north of the border, DaimlerChrysler limits the Buffalo dealership to 10 new vehicle exports a year. Some carmakers have warned they might not honour warranties on vehicles bought across the border.

However, apart from cars, Canadians have been less tempted by cross-border shopping than they were during the last run-up in the loonie in the early 1990s.

“There’s less reason for customers to go south of the border”, says Peter Woolford, vice-president for policy development at the Retail Council of Canada.

Several big US retail chains, such as Wal-Mart, Costco and Home Depot, have set up sizeable operations in Canada over the past 15 years.

Tighter border controls since the terrorist attacks of September 11 2001 have also deterred Canadian and US day-trippers. Getting back and forth across the border “takes the edge off the experience”, says Mr Woolford.

While several big exporters, especially in the forest products, steel and automotive sectors, have complained that the strong loonie is eating into profits, the Bank of Canada signalled last week that the appreciation suits its policy goals.

The central bank sees inflation as a bigger threat for the time being. Resource-fuelled growth, especially in the west, has taken it by surprise, pushing “core” inflation, which excludes the eight most volatile items in the consumer price index, above the bank’s 2 per cent target rate.

The economy is now running well above capacity, causing labour shortages on top of higher energy and commodity prices.

The bank raised its key overnight lending rate by a quarter percentage point on July 10 to 4.25 per cent, the first increase in more than a year.

Ironically, however, the interest rate rise has damped expectations that the loonie is headed for parity with the dollar. On Friday, the currency was trading at 95.5 US cents.

Douglas Porter, an economist at the Bank of Montreal, says: “While the bank is likely to hike again in September, they seem to be sending a fairly clear message that they don’t foresee a sustained tightening campaign, partly because the strong Canadian dollar is doing some of the work for them.”


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