The unprecedented run-up in the Canadian dollar last year has not turned out to be the knockout punch many had feared for exporters, a new report says.

The report, by TD Bank Financial Group economist Beata Caranci, notes that in the first quarter of 2004, Canadian export volumes remained 1.7% above fourth quarter 2002 levels and are rebounding strongly in the second quarter, according to preliminary data.

Between the fourth quarter of 2002 to the first quarter of 2004, the C$ appreciated a remarkable 20% vs the U.S. dollar, with most of the adjustment occurring the first five months of 2003. That compares with the most recent comparable appreciation in the loonie, which took place over the span of several years from 1987-1990.

That rapid jump gave Canadian exporters little chance to adjust cost or price structures, with the result a dramatic and sudden loss in competitiveness with the U.S., their largest trading partner.

“With just over five quarters of data now under our belt since the Canadian dollar first took flight against its U.S. counterpart, it appears that Canada’s export performance has held up considerably better than most – including ourselves – could have hoped for,” Caranci said.

The run-up in the C$ meant lower prices for foreign goods, raising the risk that imports would flood into the Canadian market and squeeze the profitability and market share of domestic producers, the report notes. Imports did rise over the five-quarter period, but the 4.1% gain that was recorded is rather muted given the extent of the dollar’s appreciation.

“In the end, the Canadian dollar rally not only had a relatively short-lived impact on exports but it also was not the boon to imports that many had anticipated,” Caranci said. “Indeed, the Canadian economy has weathered the rise in the loonie rather well, ending the first quarter of 2004 with a $41 billion goods trade surplus with the rest of the world.”

Caranci notes several reasons why exporters did not suffer as much as many thought they would:

  • the C$ dollar did not appreciate as dramatically against many of the non-U.S. currencies, and so there was no significant loss in competitiveness within these markets;
  • exports were boosted by a resource-guzzling Chinese economy that expanded at a rampant 9% clip in 2003;
  • the U.S. economic expansion was also gaining momentum as the year unfolded, further fueling demand for Canadian resources and other goods; and
  • it also appears that exporters reduced prices in order to partially mitigate the impact from a higher-valued loonie on volumes, though this was done at the expense of lower revenues.