Money Smart: What lower for longer means for you

During her two years as a bank teller, Kathryn-Lynn Raskina met a lot of people who were drowning in debt and struggling to pay their bills. It wasn’t because they weren’t making enough money. It was because they didn’t know the first thing about debt or about managing their money. She doesn’t want you to be one of those people. She wants you to graduate money smart.

When I was younger, we used to drive down to Florida every May. My accountant of a father wanted to teach me about money from an early age, so when he felt I was old enough — I think I must have been around nine — he took me with him to the bank to get American money for our trip. I remember being so confused when my Dad got less American money back than the Canadian money he handed over. I thought money was just money. Boy, was I wrong.

If you have paid the slightest attention to the news over the past two years, you’ve probably heard the Canadian dollar is low.

The value of a dollar:

The value of the Canadian dollar is expressed as how much one dollar Canadian is worth in relation to American money. So when someone says the Canadian dollar is at 75 cents to the US dollar, what they mean is the loonie can only purchase something that is worth 75 cents US. This means we need to fork over more Canadian money to purchase something in American dollars.

Since the Second World War, the US dollar has been the world’s reserve currency, meaning the US is the common denominator from which other world currencies derive their value. A lot of the world’s trade is in US dollars. As a result, central banks holds 60 per cent of their money in American currency.

In February 2013, the Canadian dollar was at par — or equal — with the US, which meant one dollar Canadian was equal to one dollar American. If any of your parents bought real estate in the United States during this time, they would have made 30 per cent profit on their money just on the exchange. This is because the Canadian dollar has been inching down since then. The US dollar has been rising. It reached an 11-year high in late September in its increase over the Canadian dollar. As of Nov. 24, the Canadian dollar was at 75 cents to the US dollar. It last touched 75 cents in September 2004, nearly 11 years ago.

Why has the loonie fallen:

Krishen Rangasamy, senior economist at National Bank, says the fall of the loonie can mainly be blamed on the collapse of oil prices. “The Canadian dollar moves in sync with oil,” he says. This means that when oil prices go up, so does the Canadian dollar and vice versa. He says it’s because a large proportion of our exports are oil.  

The price of oil has been cut in half since the summer. It has dropped from $115 a barrel a year ago to about $50. It’s because there is currently an oversupply of it while demand for it in China has not increased as anticipated.

Rangasamy says interest rates also have something to do with the dollar’s slump. The loonie shot further down with the Bank of Canada’s decision in July to lower interest rates.

When I asked him how long we have to wait before the Canadian dollar is at par with the US again, he laughed. “A long time.” He says it would happen if the oil went back up to $100 a barrel. But that depends on the global economy, which right now isn’t looking too good, he says.

He says global growth is only three per cent right now — the worst it has been since 2009. To make matters worse, the world’s supply of oil will only increase, he says, once sanctions are lifted against Iran because Iran will increase its exports of oil.

The Bank of Canada is also not expected to raise rates anytime soon. Rangasamy is predicting that we won’t see rates increase until 2017. He says it is because the outlook for the Canadian economy isn’t too bright. According to a report released last month by the Bank of Canada, this year our economy grew by only 1.1 per cent. Furthermore, in its most recent economic outlook, Scotiabank said it’s expecting Canada’s domestic growth to lag behind other North American Free Trade Agreement countries this year and the next.

The last time the loonie was this low, the US economy was also in bad shape, but this time, Canada is hovering close to a recession while the US economy and its dollar is doing well. With the loonie falling and the US dollar rising, it means parity is further out of reach. What’s worse is if the US raises rates — as economists anticipate they will — that will drive the dollar even lower and make parity a distant dream. According to Scotiabank’s report, the bank said it sees no end in sight for the surging US dollar.

CIBC also weighed in on the economy last month. In its foreign exchange report, it forecasted the Canadian dollar will reach its lowest level around the first quarter of 2016 as “the domestic economy proves its hasn’t fully healed from the oil price shock” and the US raises interest rates. The report was hopeful. “The tune will change” as we move through next year it said.

CIBC goes on to predict that the US will be “tightening policy at an extremely gradual pace” at the same time the Canadian economy will experience the “full rewards of the weaker loonie.” It also said, “Manufacturing and exports will lead the way to more balanced economic growth next year.” This combined with planned infrastructure spending by the Trudeau government will cause the loonie to “gradually regain some of the ground it lost this year,” the report said.

What this means for you:

For you, a lower Canadian dollar means that going to Florida over spring break is probably not the best idea. Since the US dollar is worth so much more, it means your flight and and expenses will be more expensive. I would go skiing somewhere up north, instead, if I were you.

It also means you will want to cut down on your online purchases where you have to pay using American dollars. If you are chronic online shopper, you most likely have noticed that that cute dress or pair of shoes from Macy’s has gotten a lot pricier.

A lower Canadian dollar also means that you’re going to hand over more money for food at the grocery store. A lot of our food is imported from the US, especially our produce. This is despite the fact that gas is cheaper which means the cost of transporting the food is lower.

It shows just how much we rely on other countries for food, especially during the winter. Yup, that’s right, you can say so long to those California strawberries — that is until the Canadian dollar goes up. And it will eventually. When it does, I’ll be on the first plane to the golden state.

Featured image by Augustine Ng