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"A strengthening currency that is fundamentally strong over a reasonable period of time means...

"A strengthening currency that is fundamentally strong over a reasonable period of time means you’re probably doing things pretty well," says Scotiabank (BNS) CEO Rick Waugh. Companies struggling with a strong loonie “just have to do a bit better, which is good because that’s productivity." Indeed.
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  • bob adamson
    , contributor
    Comments (4558) | Send Message
     
    Rick Waugh has a point if he is saying that Canadian enterprises need to improve their production and marketing strategies. Relying on a low CAN$ exchange rate and preferred access to the US market afforded by NAFTA for too long was an excuse for not seeking markets in Europe, Asia and South America and not streamlining production and marketing or developing new or better products. Viewed more broadly, however, he does not give due regard to the cumulative effect of
    (a) the difficulties that Canadian producers experience when, as has been the case over the past three years, the CAN$ appreciates from around 65 cents USD to $1.04 USD, and
    (b) the ‘Dutch Disease’ experienced by an economy with a very strong commodity production component.

     

    Let’s start with point (a) above. Given that about 30% of Canada’s GNP is foreign trade related (much of that being with the US), it is not difficult to appreciate the profit squeeze challenge this is presenting to the Canadian export oriented manufacturing sector. However, it isn’t only those manufacturers but also agricultural producers, the pulp and paper industry, film and TV production, the tourist industry, the automobile manufacturing industry (which is twice the size proportionate to the total economy in Canada as in the US), base and precious metal producers and petroleum producers (in short, a large range of economic sectors only some of which are mentioned) that are squeezed. Typically, all these manufacturers and producers (whether their market is primarily in Canada or abroad) pay their costs of production denominated in Canadian dollars but are paid for their products at international rates denominated in US dollars (whether they actually sell to the US or to other foreign buyers) and it follows that the rapid increase in the Canadian dollar has hit them all in the bottom line. Further, foreign competitors, including those in the US, do not face this squeeze but rather find selling their products in Canada or in competition with Canadian produced products increasingly profitable. Here is a chart showing the fluxuations in the CAN$ exchange rate in terms of the USD:

     

    static.seekingalpha.co...

     

    Turning to point (b) above, here is a good analysis of what the Dutch disease entails. It was written during the boom prior to 2007 but it applies equally today. Note that the remedies described are, at best, partial as they call for Canada to adjust as best it can to economic distortion rather than surmount such distortion.

     

    www2.parl.gc.ca/conten...
    5 Apr 2011, 10:06 PM Reply Like
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