Parity Time!

After less than two years, the Canadian dollar has once again reached parity with the U.S. dollar. For most of its life on the free-floating exchange markets, the Loonie has been happy to languish at about three-quarters the value of the Greenback. After clawing its way up from an historic low of U.S. $0.62 in 2002, the Canadian dollar reached a peak of $1.10 U.S. in November, 2007. It last traded above the U.S. dollar in July 2008, when the global financial crisis finally began to push commodities-driven currencies, like the Loonie, lower.

While today’s return to parity comes fairly soon after the Loonie’s last such foray, there has been a sea-change in both Canada’s and the world’s economy during this time that has forever altered Canada and its currency. The world will never again see a 75 cent Canadian dollar.

Way back in 2008, most of Canada was scared to death of a strong currency. It was easy to see why. Canadian manufacturing was considered the lifeblood of the Canadian economy and Canada’s trade with the U.S. was its lifeline. A full 80% of Canada’s exports were headed to the U.S. and Canadian manufacturing amounted to about 45% of those exports. With a low Canadian dollar, Canadian goods were just plain cheaper. Importantly, those statistics and that mantra have held sway in Canada’s consciousness for much of Canada’s history. In the summer of 2007, with storm clouds growing over the global economy, a strong Canadian dollar was considered a national emergency.

Not now. Today, even manufacturers are taking pleasure in seeing the Canadian dollar rise above its U.S. counterpart. Instead of desperately calling for Bank of Canada intervention in the exchange markets, Canadian manufacturers are adjusting to the reality of a strong Loonie by improving productivity and cutting costs. And recent reports show that they are having success in doing so. KPMG’s recently published 2010 Index of Economic Freedom, found that Canada was one of the world’s most competitive countries and, for the first time, enjoyed a “5% business cost advantage over the U.S.”

Meanwhile, unlike two years ago, the Government is not issuing a slew of press releases citing its concern over the high value of the Canadian dollar and pledging action to curtail such currency movement. Instead, both the Bank of Canada and the Conservative government tout the high dollar with as much gusto as they do Canada’s low debt and strong economy.

It is not that the U.S. is no longer our largest trading partner. While Canada has successfully found alternative markets, the U.S. remains Canada’s largest market and probably always will be. It is also not because manufacturing has lost its majority share of the Canadian economy. Despite gains in other sectors of the economy, the health of Canada’s manufacturers remains a bellwether of Canada’s economic well being.

The real change has come from the realization by Canada and its people that Canada can and will prosper despite what is happening south of the border. The inroads Canada has made to establish new trading partners, Canada’s relatively lower corporate tax rate, Canada’s relatively low debt, Canada’s robust economy in the face of a global economic meltdown. All of these factors have contributed to Canada’s realization that not only can it be a successful economic powerhouse without being closely dependent on the U.S., but that being independent from the U.S. is likely the only way to ensure such success.

There are other important differences between parity this time and parity last time. In 2008, a major factor in Canada’s currency rise was that the U.S. Dollar was weak. At the outset of the global financial crisis, the chorus calling for the end of the U.S. Dollar as the world’s reserve currency was growing increasingly loud. (See The Canadvocate’s Article). As a result, the U.S. dollar was seen by many to be in its death throes. The relative value of the Loonie increased as a result.

Today, the Greenback remains relatively strong against the Euro, British Pound and other major currencies and despite continued calls from China, Russia and the OPEC nations for a new reserve currency, for the time being, the world still flocks to the U.S. Dollar in flights to safety. The fact that the Loonie has reached parity with a strong U.S. dollar provides further validation of Canada’s independent economic strength.

Also, it is apparent that the value of the Canadian dollar is not as closely linked to commodities prices as it once was. While Canada’s strong economy and relatively low debt played a part in the ‘07-’08 run-up, the main factor was that oil was trading at $140 a barrel. Until now, the world has always seen the Loonie as a petro-dollar. Today, while oil prices are high, they are nowhere near $140. Furthermore, in the past year, several nations have diversified their reserves by buying Canadian dollars.

The world now sees the Loonie as a viable reserve currency, the strength of which derives not from fluctuating energy prices, the speculation of currency traders or economic coincidence, but from Canada’s own sound economic health and increased global stature. Today’s parity truly signals Canada’s emergence as a 21st century leading power. Reason for Canada to celebrate indeed.