Tentative Evidence That the Canuck Buck Is Over-valued
As I watch the NFL playoffs on US television stations, I see that McDonald's is advertising my very favourite restaurant food, double cheeseburgers, for only one dollar.
In Canada, this same delicious entree is priced at $1.39 (Cdn). Ignoring transportation costs, I could take $1.15 Cdn to the bank, get $1U.S. and buy a double cheeseburger in the U.S. for a lot less than I would have to pay in Canada. That's a huge difference, crying for an explanation.
I really doubt there is less competition in Canada, and I really doubt that McDonalds is trying to stick it to Canadians, and so the differences in the price (compared with the exchange rate) must have some other explanation.
My explanation is that the Canuck buck is a petro currency, and even though oil prices have been declining, they are still quite high historically. The result is that people want to buy Loonies in order to buy our oil (and other resource-based products), driving up the price of Loonies even though it also drives up the effective prices Canadians pay for manufactured goods.
[Of course this sounds a lot like the Big Mac Index because it's the same idea.]
In Canada, this same delicious entree is priced at $1.39 (Cdn). Ignoring transportation costs, I could take $1.15 Cdn to the bank, get $1U.S. and buy a double cheeseburger in the U.S. for a lot less than I would have to pay in Canada. That's a huge difference, crying for an explanation.
I really doubt there is less competition in Canada, and I really doubt that McDonalds is trying to stick it to Canadians, and so the differences in the price (compared with the exchange rate) must have some other explanation.
My explanation is that the Canuck buck is a petro currency, and even though oil prices have been declining, they are still quite high historically. The result is that people want to buy Loonies in order to buy our oil (and other resource-based products), driving up the price of Loonies even though it also drives up the effective prices Canadians pay for manufactured goods.
[Of course this sounds a lot like the Big Mac Index because it's the same idea.]
Category: Economics, International Trade and Finance Posted on
Monday, January 15, 2007 at 11:15pm
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On a more serious note, given what you've recently posted about investing options available to you through the RRSP - if you can reasonably anticipate that the value of the Loonie will eventually decline relative to the Dollar, now might be a good time to invest in U.S. dollar-denominated investment vehicles.
This is splitting hairs, I realize, but you can't walk into a bank and get 1 USD for 1.15 CAD... at least not on on 1/16 when you wrote the post and not for CAD cash.
It'd be more like 1.21 - 1.23 CAD per USD depdending on the bank. Even with credit cards, as Ironman suggests, you incur fees of 2-3% even though you get a wholesale rate. This approximates the retail markup on CAD by many banks.
The Big Mac Index is used by banks selling foreign cash to travelers to up sell. That is, it's used to show that the purchasing power of the USD is greater in the US than the purchasing power of CAD in Canada, therefore similar items will cost more in Canada... so why not buy more currency for your trip?
I'd pay real money to see a comparable iPod Index.