February 10, 2014 | In: Opinion

Are the Parity Days Over for the Canadian Dollar?

For the past few years (since 2007), Canadians have enjoyed low inflation because of the Canadian Dollar’s strength. This has caused a greater purchasing power for Canadians and ensured that the economy doesn’t fall into recession during the harsh years of 2008-2010. At the moment, you can purchase a Playstation 4 in Canada for $399 Canadian and for $399 US in the States. At the current rate of 1.11 (USD/CAD), Sony is selling the PS4 in Canada for 89% of its price in the US – this means that Canada is, by far, the cheapest country in the world to buy this item (in Australia it costs $549 AUD). Of course, the PS4 is just an example, but the same applies to many technology items.

Clearly, merchants will take notice of this issue sooner or later, and will raise their prices in Canada, especially if the Canadian dollar continues to drop (and I expect it to drop, the Canadian economy is based on commodities, especially oil and gold; both are dropping in price).

Now, the million (or billion) dollar question is, will this mean that the Bank of Canada is going to increase the base interest rate?

I think it does, but raising the interest rate will not help stem the fall of the Canadian dollar, and most likely, in a couple of years, the Canadian dollar will go back to the 1.5 ratio (e.g. each 1 USD = 1.5 CAD) – it would take some time for Canadians to adjust to this sudden inflation though (everything, with the exception of real estate, will cost more for Canadians).

The Canadian GDP per capita right now is at $57,000 CAD, which is more or less $52,000 USD at the current exchange rate. If the Canadian dollar goes back to the 1.5 ratio in a couple of years, then the average GDP will be something like $38,000 USD. This means that Canadians, generally, will not be as rich as they were for the past 5 years or so.

The parity days are almost over, and Canada should be prepared for that!

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