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The Federal Reserve’s interest rate 50 basis point decision drop has come and gone and even though the impact on the financial markets has been substantial, many are pondering how will this affect fellow Canadians and Americans traveling north of the boarder? The past week has marked various milestones in the global markets:

• The U.S. Dollar has plummeted to an all-time low against the Euro by breaking through the key 1.40 barrier.
• The Canadian Loonie approached parity with the U.S. currency for the first time in 31 years.
• Gold has hit a 28-year high as dollar sinks reaching $735.85 today, with the likelihood of $800 by years-end a favourable outcome.
• Crude Oil is hovering below record highs after U.S. inventories fell more than expected and as the threat of a storm gathering near Florida reignited supply concerns.

The Canadian Case:

The loonie, which has been gaining on its American counterpart since bottoming out below 62 cents in early 2002, has recently been on a spectacular run, up from 95 cents at the start of September and from under 90 cents last spring and its recent ascent is mainly caused by the surprised large cut in interest rates. Soaring demand for Canadian commodities, ranging from oil and wheat to coal, gold, nickel and zinc – have helped propel the currency, while a weakening American economy has dragged down the greenback, the world’s most widely held and traded currency.

Advantages:

The high dollar may make U.S.-made goods cheaper to buy in Canada due to the rise in purchasing power and is a boon to Canadians traveling in the United States, especially cross-border shoppers and those looking to book winter vacations to Florida or Arizona. Those trips are suddenly much cheaper than they were a month ago. On the other side of that, importers will also win big as the costs of bringing goods into Canada gets cheaper, as will whole sellers – the “middle men” in the economy.

Negatives:

But the high loonie will continue to put pressure on domestic manufacturers, who have to try to sell goods south of the border at a discount or have been priced out of U.S. markets. Manufacturers such as lumber exporters, which have not had some insulation from commodity prices, and automakers will be particularly hard-hit, as the rising Canadian dollar makes exports less competitive at the same time that the shrinking U.S. housing market is making demand for housing weak. Tourism in Canada could also be affected, as travel to Canada becomes more expensive to Americans – a drop that will likely ripple through the hospitality industry. While the manufacturing sector has lost 289,000 jobs since late 2002, the economy has created more than one million jobs in resources, construction, services, health care, education and financial industries, leaving the national jobless rate at 30-year lows.

Forecast:

With only two more Federal Reserve rate decisions on the calendar, we expect 25bp rate cuts in October and December with another half point cut may not be entirely out of the question if economic data remains weak. This spells trouble for the U.S. currency however we are heading into unchartered waters with records being posted galore so we must proceed with caution even though the U.S. economy and currency look to be in the brink of disaster. The Canadian currency will definitely trade at a premium by years-end and, possibly sooner than expected; consumers will be in joy for the upcoming x-mas season.

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