The year 1976 was a milestone year for Canada. It was the year the summer Olympics took place in Montreal and the year the Parti Quebec came into power. It was also the last year the Canadian dollar was at par with the American dollar. As most of us know, it has sunk as low as $0.62 in the intervening years.
Last week, prior to the announcement by the U.S. Federal Reserve Bank, I spoke with a Vice President of one of the leading investment brokerage firms in Canada. He advised me that he expected the Canadian dollar to reach parity with the U.S. dollar sometime during the first quarter of 2008.
A couple of days later Mr. Bernanke, the head of the U.S. Federal Reserve, cut the prime lending rate in the U.S. by a half point. Yesterday, the Canadian dollar continued its long ascent by hitting parity with the American dollar. The speed with which the Canadian dollar has moved in the past few days appears to have caught even the professional financial types off guard.
What are the implications? Here are a few thoughts.

The U.S. Economy

The fact that the U.S. Federal Reserve decided to a) cut the prime lending rate for the first time in several years and b) cut the rate by a half point versus a quarter point signifies the seriousness of the problems in the U.S. economy. During the first few months that the sub prime mortgage issue surfaced in the U.S., a number of articles were published indicating that this problem was limited to a small segment of the population and would have a minimal effect on the economy. More recently, the view is being expressed that the impact of this problem could be much more severe. The recent employment stats suggest that this problem is having a major impact on housing and related industries and on a variety of sectors in the economy. A few folks, still in the (growing) minority are beginning to use the "R" word. Whether we will have a recession remains to be seen but there is no doubt that the state of the U.S. economy is fragile. The question is how many interest rate cuts and how much time will it take to turn it around? This is not good news for Americans or Canadians.

The Canadian Economy

Our government leaders are taking great pride in the fact that the Canadian economy is one of the strongest of the G8 countries and the dollar has now hit parity with the U.S. The fact remains that the United States is still Canada's largest trading partner. Our economy is very dependent on their capacity to buy our energy, pulp and paper, automobiles and a host of other products. A rising Canadian dollar (declining U.S. dollar) has a number of major implications. For Canadians purchasing goods from the United States, this is a positive development. For many Canadian industries dependent on the U.S. market for their survival, this is not good news. Some of these industries were already in bad shape before the recent upsurge in the dollar. This will only make things more challenging.
Clearly Canadian companies must increase their global focus. It is unlikely that the Canadian dollar will drop in value any time soon against the U.S. currency. In fact, it may continue its ascent. Some folks are talking about $1.03 or $1.05 or even higher. While this is great news for the "snowbirds" planning their trips to Florida, Quebecers planning their summer vacations in Old Orchard Beach, Maine or for "baby boomers" planning the purchase of a retirement property in the U.S., it is a mixed blessing for bussinesses that are trying to build their profits.

Here are some suggested policy issues for consideration:

David Dodge - Can we afford to let the Canadian dollar increase in value against the U.S. dollar? Now that we have reached parity with the U.S. dollar, should we freeze our currency against the American dollar? Is it time to think about an interest rate cut in Canada so our dollar does not get "out of whack" and does serious damage to the economy?

Consumers - If the dollar is at par with the U.S. dollar, why are we paying twenty percent more for goods that could be purchased for less in the United States? If you are planning on buying a car, is it time to take a drive to Buffalo, Detroit, Burlington,VT or Blaine, WA to check out the prices in their car dealerships? What is the total landed cost to bring the car into Canada? Isn't this the way to force Canadian retailers to bring down their prices of books, clothes and other merchandise to the same levels that are charged in the U.S? Does it make any sense to have our dollar at par with the U.S. dollar but we are paying twenty percent more for the same merchandise?

Transportation Companies - Have you looked at getting into the cross-border intermodal business? With most intermodal rates quoted in $U.S., isn't this the time to offer this service? Are there some niche acquisitions in the U.S. that you could fold into your operation to increase market share? Have you looked at growing your market share in Canada? Are there some Canadian markets (i.e. temperature controlled freight, pharma, furniture, Quebec) that you should be taking a closer look at?

Shippers - Is it time to revisit your rates on cross-border services? Have you looked at intermodal transportation for some of your longer movements (i.e. over 1000 miles)? Can you adjust your purchasing lead times to take advantage of the cost savings? Are there some additional U.S. vendors that you can now utilize since they may be more cost competitive?

Clearly the currency issue raises a host of challenges and opportunities. I encourage all CEO's to make sure their management teams carefully think through their core strategies in light of this very important development. Also, as we have seen in the past, the dollar can fall as fast at it can rise. We cannot forget this lesson.