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Stronger loonie, tax cuts prompt warnings

Montreal, QC — Warnings abound as the Canadian dollar moved into uncharted territory recently, edging over $1.10 U…

Montreal, QC — Warnings abound as the Canadian dollar moved into uncharted territory recently, edging over $1.10 U.S. briefly last week, before moderating this week. The volatile exchange rate has been affecting Canada’s substantial export industry, and the forest industry in particular.

The U.S. think tank High Frequency Economics cautioned that recently announced federal tax cuts may result in higher interest rates and an even stronger dollar. Scotiabank revised its forecast for the Canadian dollar to $1.12 U.S. The dollar’s rise can be attributed both to the struggling U.S. currency and to Canadas strong economy, helped by rising prices of natural resources.

However, the Canadian bond rating agency, DBRS, warned that the strong Canadian dollar would do more damage to the country’s struggling forest industry. Their commentary noted that: “The financial profiles of many companies within the industry are expected to weaken to a greater extent than previously expected by DBRS, namely those with high foreign exchange, building products and energy exposure,” it said. “The sharp increase in the Canadian dollar in recent months relative to the U.S. dollar is a key headwind facing many Canadian-based companies, as most commodities are priced in U.S. dollars and a large share of production is in Canada. In addition, a sharper-than-expected deterioration in the U.S. housing sector, exacerbated by the subprime mortgage industry collapse, is expected to lead to continuing weak building products producer earnings and cash flow.”

Souces: The Montreal Gazette and canada.com