Rolling with the loonie’s roller coaster ride

By | Finance, Financial Planning

The past year has seen some record highs and lows in the value of the Canadian dollar. The loonie’s roller coaster ride has everyone on their toes.

With the loonie hitting a 10-year low in early 2016, dipping below 70 cents, and it’s recent upswing to almost 80 cents against the US dollar last month, it’s hard not to wonder about how best to plan for the highs and lows.

How foreign exchange rates of the loonie impact your saving and spending

A higher Canadian dollar makes imports cheaper since the dollar stretches somewhat more against foreign currency. A steady rise in the value of the Canadian dollar points towards lower prices of imported goods such as cars, clothing, electronics, and other everyday products. This saves the average Canadian a good chunk of money on their spendings.

Possibly the best perk of the rising loonie is enjoyed by those of us looking to travel abroad. If you’ve taken a vacation outside the country in recent years, you can attest to a rise in travel costs. The slump in the loonie’s value against the US dollar lead to an understandably steady decline in Canadians travelling south of the border for a holiday. Although, non-U.S. travel picked up. Popular choice for vacation destination being countries like Mexico, France and the UK, whose currencies were stable relative to the Canadian dollar.

Similarly, cross-border shopping has also taken a hit in recent years. Since 2013, Canadian spending in the U.S. has declined considerably due to the dive in the Canadian dollar. Now, as the loonie catches up, so will your shopping budget for that trip down south. Same-day trips to the U.S. are generally highly correlated to the Canada-U.S. exchange rate – better the rate, more affordable the day trip.

Not all spending gets a boost with a rising loonie

While a stronger loonie is always a boost for imported good, this may not hold true for exported goods. Logic dictates that when the loonie rises, Canada’s exporters suffer as their goods become more expensive and less competitive.

Although, that isn’t necessarily true anymore. The steady weakening of the Canadian dollar between 2012 and 2016 failed to give Canadian exports a boost. As more Canadian companies rely heavily on imported parts, which become cheaper when the Canadian dollar strengthens, the relationship between the currency value and export becomes less obvious.

Similarly, while the falling value of the loonie may have been a good thing for Canadian real estate in general, it left the local buyer at a disadvantage. A low dollar meant that real estate was on sale for foreign buyers despite skyrocketing home prices for local Canadians.  With the recent spike in the dollar, it’s still too soon to say exactly how this will affect the housing affordability for the local Canadian buyer.

Riding out the highs and lows

Honestly, the best possible way to stay afloat in uncertain times is to limit risk. Staying away from forecasts and speculations is definitely a smart move. Another smart move is to hold off on investing in U.S stocks, and not opening yourself up to currency risk thanks to the fluctuating rates. If you must, hedge your investments through tools such as exchange-traded funds to offset the effects of changing currency values.

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