What’s Happening With The Canadian Dollar Versus US Dollar?

Over the years, I have mentioned that it is a good practice to have income appear in the currency you intend to use when you spend it. Many Canadian retired people find that 30% or so of their spending is in US dollars. They pay the costs to convert and have the innate unpredictability of the conversion rate complicating their lives. Since mid-August, the C$ has fallen almost 10%. That makes the winter vacation appreciably more expensive.

It also makes other commodities and services more expensive. Oil is invariably priced in US$, most airplane tickets too. Even when you are not spending US dollars, you’ll find that because it is the world currency, it influences what you pay. Where does lettuce come from in the winter? Oranges, Pecans, cotton. Foreign exchange affects you every day.

Where to go next.

The current wisdom is currencies are not falling in value so much as the US dollar is becoming stronger. The problem is growing just now, but I suppose it will retrack eventually. You might wonder how it happens, and there is an obscure answer.

All economies in the world are linked, and for now, the US dollar is a part of each. Few international bank-to-bank transactions cannot be settled in US dollars. When the US decides to fight inflation by raising its interest rates, money floods in. The current inflation-fighting initiative is the most aggressive in at least four decades.

Currencies in other countries fall in relative value because people prefer the US$. Until foreign central banks make local bonds and treasury bills competitive, the US$ will appreciate. Someone in Japan today could borrow in Yen, convert it into dollars and make an annual rate of return 4 % to 5% higher than they could in Japanese short-term government bills. While the local gas station owner might not do it, the banks will.

It is not likely to last because when adversity happens, people adjust.

Sorting out adversity.

Looking only at the past 6 months, you can see how the US$ appreciated, and correspondingly other currencies depreciated relative to it. That change will tend to go away as everyone adjusts. Some will raise rates, and the US may reduce theirs. I doubt they want to pay more than they must on their debt, and the high dollar value hurts their exports.

The American federal government owes about $30 trillion dollars. A three percent interest rate increases their financing costs by $900 billion a year. Someone with $10 billion in their account could pay the increased cost for four days. It will likely be a combination of interest rates, market sales and purchases of existing bills and bonds. Central banks have many controls on the dashboard.

So the Canadian dollar, at 72 cents US, may be just a short-term aberration, and it will return to the 80-cent mark in due course. The fact that it looks acceptable at 80 cents tells us a different story if we look at a 20-year period. It has been as high as 109 US cents in the past 12 years, but persistent government mismanagement since 2015 has dropped it into the high 70s as a reasonable exchange rate. That drop to 80 cents or less is the result of a failure to keep pace with productivity and the immense and often unnecessary optional choices the government has made. There is no shortage of boondoggles to assess. Inefficiency is nearly a requirement.

But not all is the government.

On the objective side, businesses in Canada tend to be smaller than in the US. The percentage of businesses with fewer than 500 employees is noticeably higher in Canada. Smaller businesses tend to be less capital intensive, and so productivity is lower. The foreign exchange rate is tied to productivity. If you want to see large, automated businesses, they are easier to find in the US. Capital investments can be recovered easier in a big market. Robots are very productive, but not everyone has enough volume to afford them.

That might not change soon because capital investment is riskier than adding people. You cannot lay off the lease payments on a robot, so Canada and other small market countries will tend to lag. Trailing productivity tends to compound. How do we get around that?

Most businesses today are having trouble finding people to work. I don’t see how that can continue indefinitely unless the government wants to keep supporting them. Choosing that misses the point that businesses will decide to go elsewhere, or at a minimum, expand elsewhere. If that happens, the resources to support the people will dry up just as they become more needed.

Everyone who refuses to work for the chump change minimum wage of $15.50 in Ontario may be looking for a job at a lower pay rate in the future. In theory, the minimum wage can fall too.

Productivity matters, and governments cannot fool the exchange markets for long. A currency trader in London, Singapore, or  Zurich doesn’t need Canada.

What to do? If you are concerned about currency chaos, and to be concerned is not such a crazy idea, diversify some. Some US$ holding seems reasonable.

Watch for central banks changing their policies to cope.

The bits to take away.

Much of your financial context is not controllable, but you can hedge things like currency change. It’s similar to diversified investments.

Structural problems in the economy can change too, but slowly. If government policies are not acting to make life better, think about how, as a group, we could amend those. Be a little careful. Sometimes things you disagree with are necessary. That is the curse of governing. You can’t please everyone.


I build strategic, fact-based estate and income plans. The plans identify alternate ways to achieve spending and estate distribution goals. In the past, I have been a planner with a large insurance, employee benefits, and investment agency, a partner in a large international public accounting firm, CEO of a software startup, a partner in an energy management system importer, and briefly in the restaurant business. I have appeared on more than 100 television shows on financial planning. I have presented to organizations as varied as the Canadian Bar Association, The Ontario Institute of Chartered Accountants, The Ontario Ministry of Agriculture and Food, and Banks – from CIBC to the Federal Business Development Bank.

Be in touch at 705-927-4770 or by email at don.shaughnessy@gmail.com.

2 Comments on “What’s Happening With The Canadian Dollar Versus US Dollar?

  1. In today’s time, money is the object of every man yet there are far better wisdoms ought to be known to make man’s life more meaningful. I have known people who have money more than what they need yet they live an uncomfortable life.

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