Strong loonie makes winners, losers

It's down. It's up. It's down. It's at par.

The loonie has been on quite a ride of late, as strong commodity prices and concerns over the solidity of the U.S. dollar combine to once again lift it to levels where it's flirting with parity with the American currency.

The loonie has tested parity several times since its last great surge, when it touched $1.10 USin late 2007.

Each new move towards parity brings out a new round of forecasts. UBS, for instance, is calling for the Canadian dollar to hit $1.05 US by the fall of 2011. Not to be outdone,RBC Global Asset Management chief economist Patricia Croft has told exporters to brace for a loonie worth $1.15 US sometime in 2011.

With so much of Canadian economic activity tied directly to trade with the U.S., a loonie at parity or well over posesenormous challenges as well as some opportunities.

Winners and losers

On one side are manufacturers and exporters. A strong loonie makes it more expensive for Canadian companies to sell their goods south of the border everything from lumber to auto parts. A rising loonie also makes it cheaper for Canadians to import goods from south of the border.

That reality is already showing up intrade statistics. Canada's trade deficithit a record $2.7 billion in July.Exports to the United States fell 2.2 per cent that month, while imports from the U.S. rose2.9 per cent.

Canadian companies that facecompetition from Americanimports arefinding conditions challenging. Maple Leaf Foods, for instance, announced in Octoberthat it would be closing plants and raising prices as part of an efficiency drive. It's facing growing competition from U.S. food processors that have taken advantage of a strong loonie to double their Canadian market share in the last five years.

Maple Leaf CEO Michael McCain said a 65-cent dollar masked his company's productivity gap. "But when the currency migrated to parity, all of a sudden it is a problem, and the solution is scale, which is consolidating those facilities into larger, more efficient, low-cost plants," he says.

The Canadian film industry, which in the past counted on acurrency advantage to help lure Hollywood productions north, is finding thisedgehas all but disappeared. Fortunately, the attractions of filmingin Canada includinglucrative film production tax credits have helped keep the cameras busy in "Hollywood North."

A rising loonie means Canadian investors face acurrency risk. Even if a stock price nominally rises in U.S.-dollar terms, Canadian owners of the stock can find their returns reduced or even eliminatedonce the market value isconverted to Canadian dollars.

Advisers recommend that investors consider hedging their U.S. investments perhaps through anexchange-traded fundthat uses hedging strategies to offset theeffects of changing currencyvaluations.

On the other side of the winners-versus-losers coin are consumers and travellers, hoping themuscle-bound loonie can add some heft to their purchasing power at home and abroad.

A strong loonie also makes it cheaper for Canadian industry to buy American technology to boost productivity.

Volatilityconcern

As a whole, the manufacturing industry has been trying for years to diversify its customer baseto reduce reliance on the U.S. market.

Buy American provisions have sped up that process and caused Canadian firms to seek new markets. But when you're used to feeding the world's largest economy, it's a toughprocess to find new dance partners.

According to Canadian Manufacturers and Exporters,a strong Canadian dollar is never good for business, butmassive fluctuationsare worse.

"It's not so much the value but the volatility," said Jeff Brownlee, the association's vice-president of communications. "Through this whole recession, we've been telling our members they have to be able to compete on par with the U.S. dollar."

The issue also has ramifications for domestic consumers. When the loonie peaked at $1.10 US in 2007, there was outrage that prices for common goods in Canada remained well above those in the U.S.

"As the dollar reaches parity, retailers get a lot of it a lot of people out there pointing fingers, complaining about gouging," Mark Beazley of the Retail Council of Canada told CBC News.