Greater pricing power to help Canadian exporters withstand loonie surge

TORONTO: A stronger Canadian dollar is usually seen hurting exporters, but the nature of the global economic recovery could help firms pass on their higher costs from the currency to customers, leaving exporters in less pain than in previous cycles.

Exports account for nearly one-third of Canada's gross domestic product, compared with about 12% for the United States, making Canada's economy more sensitive to a stronger currency, with the loonie trading near a six-year high versus the US dollar.

But exporters could remain more competitive than usual after the Covid-19 pandemic led to a surge in the amount of money available for consumer spending, bolstered by government support measures. A global shortage of goods, due to supply chain disruptions, could also help.

"The appreciation that we are seeing in the currency now is less of an issue than in most other appreciations that we have seen," said Peter Hall, chief economist at Export Development Canada.

"There are not enough goods and services available to satisfy the demands of the marketplace at the moment. And in that case there is probably pricing power," Hall added.

The prices that Canadian manufacturers charge for their products increased at a record pace in May, while activity climbed for the 11th straight month, data from IHS Markit Canada showed last week.

Canada's major exports include autos, oil and other commodities. With commodity prices soaring, the Canadian dollar has been the top performing Group of 10 currency this year, advancing 5% against the US dollar.

It hit a six-year high near 1.20 per greenback, or 83.33 cents US, last week. The Bank of Canada has said that further appreciation could weigh on the economy.

The loonie traded close to parity for much of the 2007 to 2013 period, contributing to a slow recovery for Canada's exports from the global financial crisis. "What (business) was left behind after that period of an overvalued currency was relatively strong," said Doug Porter, chief economist at BMO Capital Markets.

That reduces the risk of a "hollowing out" of the sector during the current episode of currency strength, Porter said.

At Magna International Inc, a major Canadian producer of auto parts, global diversification of its operations helps protect against currency strength. "Movements in the Canadian dollar have become relatively less impactful to our overall business," a company spokesperson said in an email to Reuters. "Increased global economic activity, and in particular global light vehicle production is a more important factor to our outlook."