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December 14, 2010

Dollar at par is more curse than blessing

CANADA - The Canadian dollar is continuing to hover near parity with the U.S. dollar, often being worth slightly more than the U.S. dollar in recent months. This is a nuisance for anyone who is paid in U.S. currency and there is a whole list of reasons for why parity is both a blessing and a curse for consumers, businesses and for the Canadian economy.

ie. If you buy a lot of things from the USA, you're probably doing better lately because your Canadian dollar can buy a lot more. But if you (for example) run a magazine and accept advertising from the USA in American currency, then you're making less.

It really depends to the degree of the individual or business and their spending habits / income sources. ie. You might start insisting that you be paid in Canadian dollars, because they're worth more and you don't lose money in the exchange process.

Here is some ways you may be making or losing money.

#1. Exports are Expensive. Heck, your job might be in danger if you work for a company that depends on exports to the USA. They might decide its cheaper to hire someone (or move the whole factory) to an American city.

#2. Industries such as forestry, mining, autos, high-tech, and most other manufacturing often price their products in U.S. dollars for shipment into other markets (not just the USA), so they directly feel the pain because their products are suddenly more expensive and will sell less often.

#3. Lower demand = Lower production = Fewer jobs and a lower income ripple effect. Some industries are immune right now, ie. the mining sector is enjoying record high gold prices and strong market conditions, which offsets the parity disadvantage and incredibly profitable. Other sectors however, like automotives and manufacturing, can be hurt as more parts manufacturing is done in the USA or overseas.

#4. Imports are cheaper, but its a double edged sword. Sure, you can buy books, gifts, electronics easier because they're cheaper when you shop across the border, but that is money you are taking out of the Canadian economy and pumping into the American economy (often to buy something which is made in China).

#5. American real estate is suddenly really cheap. Especially in places like Florida or Arizona which the housing market has collapsed. Heck, even Detroit looks attractive. See $68,007 for a four bedroom house in Detroit.

#6. Real estate however is a long–term investment and comes with a variety of upkeep costs like insurance, electricity, etc. Both insurance rates and electricity rates are rising in the USA so it may not be worth as much as you think. There is also taxes, financing and legal problems since many American homes were foreclosed on illegally during the Great Recession.

#7. Cheaper Stocks. You could diversify your stock portfolio with U.S. investments, but again this is a double edged sword. Any time you spend money outside of Canada you are in essence hurting the Canadian economy.Yes, you could invest in U.S. financial assets, such as exchange trade funds (ETFs) and mutual funds which are both common and practical, but since Canada's economy is still on the ropes it might be safer to invest closer to home while the Canadian economy is still in recovery mode. Plus many American companies are still pretty risky at this time and its amazing they haven't had another stock market crash.

#8. Exchange-rate fluctuations can boost or limit investment returns. The Canadian dollar is expected to go even higher in the future, possibly as high as $1.10 USD by June 2011. Investing in the USA now means you will likely take a -10% drop in your investment later.

#9. Its cheaper to travel to the USA right now, but its also cheaper to travel many places right now because the Canadian dollar is so high. South America, Africa, Europe and Asia are also just a plane ride away. You can compare prices online and you quickly realize you have a lot of cheap alternatives that are more exciting than the crime infest USA.

#10. 12% more Ontarians are traveled to the USA this year, a combination of cross-border shopping and tourism. This demand has driven up the price of hotels in the USA, so it may seem like less on your wallet but you're probably still spending more than is necessary.

#11. Shopping for a car in the USA is way cheaper right now. Plus American cars have less rust on them due to less road salt in the Winter.

#12. With the Canadian dollar expected to keep rising in value it might be better to keep your money in Canada. When it reaches $1.10 USD then you can splurgh a little by taking a trip to go shopping / etc in the USA.

Traders in futures markets are hoping the Canadian dollar will drop in 2011, but most economists are predicting a 5% to 10% rise in the Canadian dollar's value. Worse, sine the USA is deliberately devaluing their currency, the U.S. dollar could drop in value simultaneously to the tune of 5% to 15%. Thus the Canadian dollar could rise in the next year dramatically compared to the USD, anywhere from 5% to 25%.

Of course such a staggering rise would hurt Canadian exports, which would cause our dollar to come back down in value. Thus what we can really expect is a turbulent up and down ride in 2011.

Meanwhile...

HOUSEHOLD DEBT IN CANADA IS SKYROCKETING

According to Statistics Canada, the amount Canadian’s are spending compared to what they can afford to spend hit an all-time high in the last three months.

In a report released yesterday, between July and September 2010 the ratio of household credit market debt (consumer credit, mortgages + loan debt) to personal disposable income increased to 148.1%. Its up almost 5% from the second quarter when the ratio was just under 143.5%.

This means Canadians are overspending on credit and need to be paying off their credit cards, mortgages and lines-of-credit more. Many Canadians are spending their paycheques before they even receive them, and worse, one in three Canadians is living from paycheque to paycheque. If they lose their jobs they could be in serious financial peril (ie. homeless).

As a double whammy Canadians are also earning less. The average income is down compared to 2009 and still below 2007 levels. The number of high paying jobs have dwindled.

While the Canadian economy may be showing signs of improvement in the stock market, joblessness is still high and the current Conservative government is squandering any stimulus money in their own political ridings.

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