Exchange Rates

MD Siyam HossainBangladesh Institute of Business & Technology

Narayangonj,DhakaDhaka,Bangladesh

Overview

• Introduction - Nola Lamoureux• Canadian Productivity 1974-2004 – Tarun Biju• Exchange Rate and Productivity Connection – Arpan

Munier• Forecast effect of rising Canadian dollar on Canadian

economy – Indranil Dutta• Effect on exporters and consumers of par exchange

rate – Peter Carrington• Conclusions: Is a stronger Canadian dollar a good or

bad thing? – Nola Lamoureux

MD Siyam Hossain

Productivity ?

Productivity = Output .

Resources Used

Labour Productivity Multifactor Productivity

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How is productivity measured?

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Average Labour hours - Canada

1947 - 2,364 hours per year

1970 - 1,986 hours per year

2004 - 1,751 hours per year

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Relative Canada – US Labour Productivity

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Exchange Rate & Productivity

Declining Cdn/US $ Exchange Rate-• Benefits

• Canada has greater purchasing power in the world.• Cost cuts even when sourcing raw materials from Asia (China).• Investment opportunity- US made machinery, boost efficiency• Difficulty of adjusting to a strengthened Cdn $ will make

companies/exporters more efficient. • Better long term planning and distribution centers.• Some companies will have lowered US dollar debt.• Supply change management - border delays, communications

and transport costs.

MD Siyam Hossain

Exchange Rate & Productivity

Declining Cdn/US $ Exchange Rate-• Detriments

• Loosing US market shares to Asian companies.• Can’t rely on exchange rates to sell more in the US.• Export commodities (oil and metals) prices rise in the world.• Canadian exporters loose ground and have difficulty competing.• Largest trading partner US is less inclined to buy.• Reduced surplus and reduced export receipts.• Relocation of inventory and change in distribution patterns.

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Future Tense?

Business leader survey (May 06): Ideal 0.86 , expected 0.93 (early 2007) 33% : out of business 40% : will not trigger recession , 24% : will. Lower support to adopt the US$ (from 54% in 2001 to 29% )

Source: ‘North American Outlook’, BMO Economics Department Oct 2005

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Future Tense?

Canadian Chamber of commerce: Rates rise as:

End of American Job creation Act of 2004 End of the Fed’s tightening cycle

0.84 by year end – slowdown of global economy

BMO: Delay or slower pace of interest rate increases.

End Results:

Negatives: Exports with US (82%) effected

Positives: Imports affordable Reduces amount of debt held in US$ Incentive to enhance productivity.

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Par Dollar: Will it happen?

Debatable

Yes, Bank of Canada would slow the dollar before it could get that high

Commodities will ease up by 2007 Or, Alternatively: Could happen by Fall 2007 All currencies may be rising against weak US

economy Commodities could continue to rise

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Effects of Par Dollar on Consumers

Imports from the US would be cheaper. Not those from other countries though.

More American vacationing.

Harm to export industries could mean lost jobs, harm to economy as a whole and therefore less spending.

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Effects of Par Dollar on Exports

US$ exports (70% of total) will be less profitable for exporters.

CAN$ exports will be more expensive for purchasers and therefore less attractive.

Manufacturing and forest products will be hurt.

Commodities exporters will continue to be fine.

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Is a strong dollar good or bad?

Benefits: Decreased cost of Imports that cannot be produced

domestically Increase in Competitiveness Reduced cost of foreign debt

Is a strong dollar good or bad? Disadvantages:

Decreased cost of imports that can be produced domestically Increase in price of exports Decrease in tourism

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However …

many Canadian firms have hedged their foreign currency positions

the import content of our exports has grown, more and more Canadian firms are borrowing

in U.S. dollars, increasing numbers of Canadian firms are

generating US dollars in their U.S. operations.

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Conclusion

Many of the effects of the exchange rate may be offset by other developments in the North American and global economies

A higher dollar could mean productivity gains, an improvement in our international buying power and a higher standard of living in Canada

Although there are some downsides to a stronger Canadian dollar, if we are prepared, it is probably a good thing. (or at least not all bad)

MD Siyam Hossain

Referenceshttp://www.edc.ca/english/docs/GEF_exportupdate_e.pdf

https://my4.dal.ca/webmail/services/go.php?url=http%3A%2F%2Fwww.mapleleafweb.com%2Ffeatures%2Feconomy%2Frise-fall-dollar%2Findex.html

http://www.parl.gc.ca/37/2/parlbus/commbus/senate/com-e/fore-e/rep-e/rep06nov03-e.htm#D.%20%20Overall%20Consequences%20for%20Growth:

http://www41.statcan.ca/3764/ceb3764_002_e.htm

North American Outlook, BMO financial group, Economics Department, Oct 2005.

BDO Dunwoody CEO/ Business Leader Poll, by COMPAS, for the Financial Post, May 23, 2006

The Canadian Chamber of Commerce – Economic Review and Outlook

http://www.cbc.ca/news/background/dollar_cdn/"What's behind the soaring Canadian dollar?" CDC News Online, May 2, 2006

http://www.cbc.ca/story/business/national/2003/06/27/auto_030627.html"Rising dollar cuts into Canada's auto sector surplus: Scotiabank" CBC News Online, Jun. 27, 2003

http://logisticsquarterly.com/issues/10-1/article3.html"The Impact of Exchange Rates on Supply Chain Management" by Nightingale and Ferguson

"Trade, Money and Wealth in the Canadian Economy" by Richard G. Harris, Sept. 14, 1993

http://www.bankofcanada.ca/en/speeches/2006/sp06-1.htmlRemarks by Sheryl Kennedy, Bank of Canada Deputy Governor to the International Finance Club of Montreal, Jan. 12, 2006

http://www.mapleleafweb.com/features/economy/value-canadian-dollar/index.html"The Value of the Canadian Dollar:Exchange Rates, Currency Markets & Monetary Policy" by Jay Makarenko

http://www.statcan.ca

http://trugroup.com/canadian-competitiveness.html

http://www.economy.com

MD Siyam Hossain