Loonie up, price gap growing

The loonie may be trading at a three-year high relative to the U.S. dollar, but a report released Thursday says Canadians still pay far more than Americans for common consumer items.

The report by BMO Capital Markets’ deputy chief economist Douglas Porter said that despite the loonie’s surge to US98¢, the average price during the past three months — it closed Thursday at US104.19 — Canadians still pay 20% more than Americans for products ranging from blu-ray movies to running shoes. That difference was only 7% when the Toronto-based bank conducted a similar study in July 2009, even though the loonie was trading below US92¢ at the time.

“There has been precious little movement in underlying relative prices in the past two years despite the currency’s record sprint,” Mr. Porter said.

The loonie has surged 30% in the past two years, which is widely attributed to a retreating U.S. dollar, surging commodity prices and Canada’s growing reputation as a fiscally safe harbor following the global financial crisis.

Unlike 2007, the last time the loonie flirted with U.S. dollar parity, the current trend is here to stay, Mr. Porter believes.

“Canadians should get accustomed to a lofty loonie, and we continue to look for the currency to remain above par through 2012, if not beyond,” he said.

That will help keep inflation low and interest rates steady, the study found. However, the study stops short of explaining why the gap exists despite the higher loonie.

“The reality is that the underlying prices that Canadians pay and Americans pay really don’t change that much over time, but the currency has these huge swings that can make this sort of comparison shopping between Canada and the U.S. go all over the place,” Mr. Porter said in an interview.

“In the last four years we’ve seen our currency as high as US$1.10 and as low as US77¢. That is an enormous, enormous gap and an enormous swing that can affect these price differentials.”
For Canadian retailers, the issue comes down to a practice known as “country pricing,” in which suppliers will charge Canadian retailers more than their U.S. counterparts for identical products.

“We know there are some products sold to retailers in Canada at a markup of 22% compared to retailers in the U.S.,” said Diane J. Brisebois, chief executive of the Retail Council of Canada.
Ms. Brisebois took issue with the BMO report’s comparison of running shoe prices.

“When you show a price of US$101 in the U.S. versus $149 in Canada, what he needs to find out is how much that Canadian retailer paid for that running shoe, and chances are that retailer paid more than US$100,” she said.

BMO has already started to see upticks in cross-border shopping as Canadians seek to take advantage of lower U.S. prices. That will put some downward pressure on prices in Canada, said Mr. Porter, though not enough to ensure the price gap is ever fully closed.

“I’m not sure even if we stayed at par for years and years and years that the spread would ever completely vanish,” he said.

But the longer Canada’s currency stays at or above parity, Ms. Brisebois said, “the sooner consumers will see those savings reflected in the price of goods in Canada.” http://business.financialpost.com/2011/04/14/loonie-up-price-gap-growing/

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