BUSINESS

Canadian Dollar Overvalued By 10 Per Cent, World Economics Says

10/15/2013 12:24 EDT
AP

The Canadian dollar is suffering from overvaluation, according to a new measure of global currencies’ value.

The loonie is 10.1 per cent stronger than it should be when comparing the cost of a basket of goods here and in the U.S., according to analysts at World Economics who are testing out a new measure to compare prices worldwide.

What this means is that the loonie would have to be 10 per cent lower for goods to cost the same in Canada as they do in the U.S.

The estimate agrees almost perfectly with an analysis from BMO Capital Markets, released last week, that shows prices in Canada are about 10 per cent higher than they are in the U.S. However, that actually marked a narrowing of the gap, from around 14 per cent in May of 2012.

But Canada’s high-flying dollar is still not as overvalued as currencies in some other countries. The euro in France is overvalued by 28 per cent, when looking at the cost of goods in that country. At the other end of the spectrum is India, whose rupee is undervalued by about 45 per cent, the survey found.

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Shopping in Canada vs. Shopping in the U.S.

The reasons behind the loonie’s strength have been a matter of political contention recently. Believers in the “Dutch Disease” theory say the booming energy industry is pushing the Canadian dollar higher and causing Canada’s long-running decline in manufacturing exports.

An alternative theory from the University of Calgary’s Serge Coulombe says it’s not so much a question of the loonie rising as it is a question of the U.S. dollar falling, and Canada’s excessive reliance on the U.S. as an export market means the country is vulnerable to a shrinking U.S. dollar.

The relatively high prices in Canada compared to the U.S. have become a concern for consumers in recent years, as the loonie has flirted with U.S. dollar parity.

According to a National Post report, the Harper government is planning to make the issue a focus of the new term in Parliament, part of a broader push to address consumer issues.

A "secret" Harper government policy report found that “country pricing” is the largest factor in the price gap. As HuffPost has reported before, country pricing is the practice of large multinational manufacturers and retailers selling at higher prices in certain countries because they believe consumers will pay the higher rate.

Many retail industry insiders say Canada is a prime example of higher consumer prices due to “country pricing.”

With commodity prices under pressure and exports still sluggish, observers expect the Canadian dollar to decline slightly in the coming months. TD Bank is forecasting the loonie will hit 90 cents U.S. by the end of the year.