The Canadian Press

With the loonie once again nearing parity with the U.S. dollar, a new report on the currency is giving hope it may not be the menace to the economy many believe it to be.

The Conference Board weighed in on the subject Monday with a surprising argument – a strong loonie and currency volatility are a net negative for the economy, but not a major impediment, particularly if firms take steps to adapt.

More surprisingly, the think tank said currency fluctuations impact the service sector more than the manufacturing, mining and oil and gas industries, because the latter have found ways to hedge against rapid changes.

The more global and integrated a company is, the more it can ride out the ups and downs of Canada’s relatively volatile currency, the Conference Board said.

“The manufacturing sector was largely able to shrug off the impact of currency volatility prior to the recession,” the report points out.

“Most manufacturing industries managed well, as they are integrated into global supply chains, importing inputs into the production process, investing in imported machinery and equipment, and investing in plants abroad.”

In other words, said Louis Theriault, who authored the report, companies that are “internationalized” gain from a high currency in one aspect of their operations, while losing in another aspect, a kind of seesaw that evens out the bumps.

It’s a lesson all Canadian companies that have large exposure to foreign markets should learn, and quickly, said Theriault.

Many firms in Canada’s key industries have internationalized, particularly manufacturers of non-metallic products, computer and electronic products, plastics, primary metals, mining, and oil and gas extraction, he said.

The report notes that factory output expanded by 1.3% between 2003 and 2006, despite rapid dollar appreciation.

A strong loonie also brings general benefits to the economy, including lower prices for consumers, keeping inflation in check, and lower interest rates, which encourage businesses to invest.

But the most common view is that an overvalued currency hammers Canada’s manufacturing base, since about half of what factories produce is headed across the border or in some cases overseas.

The Bank of Canada has repeatedly fretted about the soaring loonie, citing it as a threat to the fragile economy. At times, governor Mark Carney has threatened to take action to prevent it from outstripping so-called economic fundamentals.

Despite Monday’s respite from a recent surge, the vast majority believe the loonie is headed north of parity in the next few months. And unlike November 2007 when it went as high as 110 cents US, this time it looks like it will say there throughout the rest of the year and next as well.

On Monday, the dollar lost 0.13 of a cent to 98.07 cents US.

Bank of Montreal economist Douglas Porter notes that the currency is only one of many factors that have hurt some of Canada’s manufacturing industries, along with uncompetitive practices, lack of innovation and most recently the collapse of markets in the U.S.

“If a high currency were the only factor at play, there would be no manufacturing in Japan and Switzerland,” he said.

But Porter worries that manufacturers may not be able to withstand both the run-up of the loonie and soft demand in the United States, Canada’s biggest market.

A spokesman for the Canadian manufacturing industry said the Conference Board’s analysis may be an accurate reflection of reality, but added that still doesn’t mean Canadian firms won’t be hard-pressed to compete in the next few years.

Firms that sell inside Canada but get inputs from outside the country will actually benefit from a high-flying loonie, said Jayson Myers of Canadian Manufacturers and Exporters

But he said there are many companies in the other boat, who export all their products to the U.S., with its relatively devalued currency, while paying for much of their material in high-valued Canadian dollars.

“As a whole, you have a large part of the economy that loses money when the dollar rises in value,” Myers said, adding that volatility also causes more problems than is generally acknowledged.

“If you sign a contract to sell your product when the Canadian dollar is at 85 cents (US) and by the time you deliver, it is 95 cents, you just lost 12% of your profit in a couple of months.”

Myers said most firms have now accepted that if they are to survive, they must plan for a loonie at par or better.