Now who's got Monopoly money?

As I write this, the Canadian dollar stands at 99.73 US cents. But earlier today, it achieved parity:

The Canadian dollar came within a whisker of parity against its US counterpart, buoyed by broad dollar weakness and strong oil prices.

The US dollar hit a low of 1.0001 cad as the Canadian currency benefited from a broad rise in risk appetite after the Federal Reserve's 50 basis point rate cut earlier this week.

[...]

Meanwhile, the Canadian dollar has also gained a boost from the current very high oil prices. The currency typically responds to movements in the oil price given that Canada is a major oil exporter

A catalyst for the move through parity, which has not happened since November 1976, could come if any of the US data due today -- including US weekly jobless claims, leading economic indicators and the Philly Fed index -- come in on the weak side and spark further dollar selling, analysts said.

So, when will we Canadians start seeing lower prices?

"With the dollar going down, it should make the imports cheaper, and purchasing-power parity should say that the prices should drop in Canadian dollars," said Sean Cleary, a finance professor at Saint Mary's University and associate dean of the Sobey School for Business.

"But it's not happening, or it's certainly happening very slowly."

The numbers speak for themselves. I surveyed the Canadian and American websites of several major manufacturers yesterday to do price comparisons. I found few examples of Canadians receiving the benefit of near-parity.

Among the four cars I surveyed, the exchange value Canadians are receiving for the dollar varied significantly. The manufacturer's suggested retail price on a Mercury Grand Marquis offered us only 64 U.S. cents on the Canadian dollar, but for a Ford Focus, we got 91 cents. The loonie hasn't traded as low as 64 cents since January 2003.

[...]

Doug Porter, deputy chief economist with BMO Capital Markets, told The Canadian Press it's unrealistic for consumers here to expect prices to drop along with the exchange rate. He said retailers have fixed costs in Canadian dollars - including labour and rental costs, property taxes and utility payments - that are unaffected by currency fluctuations.

Fine, but that can't possibly explain all the discrepancies.

Cleary, though, said he doesn't suspect price gouging. He thinks Canadian prices for consumer goods will lower eventually.

"It's an adjustment that does take time," he said. "That 'purchasing-power parity' is the theorem that things should gravitate to the same price in different countries, but not necessarily immediately. It could be a little bit of a lag to adjust."

If the loonie stays this strong, Canadians will likely do more cross-border shopping (or, for those of us not massed along the American border, internet shopping) and Canadian vendors will have no choice but to lower prices.

Some historical background here.

Damian P.

Posted by damian at September 20, 2007 05:58 PM